Question

A7X Corp. just paid a dividend of $1.35 per share. The dividends are expected to grow at 40 percent for the next 9 years and then level off to a growth rate of 5 percent indefinitely.

   

If the required return is 12 percent, what is the price of the stock today?

Answer 1

let me know if you need any clarification -

Price today =present value of 9 year dividend + PV of terminal value at year 9
i	ii		iii	iv=ii+iii	v	vi=iv*V
year	Dividend		Terminal cash flow	Total cash flow	PVIF @ 12%	present value
1	$                              1.89	=1.25*140%		$     1.89	0.892857	$     1.69
2	$                              2.65	=1.89*140%		$     2.65	0.797194	$     2.11
3	$                              3.70	=3.7*140%		$     3.70	0.71178	$     2.64
4	$                              5.19	etc…		$     5.19	0.635518	$     3.30
5	$                              7.26			$     7.26	0.567427	$     4.12
6	$                            10.16			$   10.16	0.506631	$     5.15
7	$                            14.23			$   14.23	0.452349	$     6.44
8	$                            19.92			$   19.92	0.403883	$     8.05
9	$                            27.89		$ 418.39	$ 446.28	0.36061	$ 160.93
						$ 194.42
Therefore price toda =					$ 194.42
Note : Computation of terminal value
Terminal value = year 10 dividend /(required rate - growth rate)
	=27.89*105%/(12%-5%)
	$                         418.39