Question

Greyhound Chemicals has just developed a new adhesive. As such, the firm expects dividends to grow at a rate of 30 percent for the next two years, then grow at a rate of 12 percent for the following three years, and then settle down to a growth rate of 6 percent for the infinite future. If the most recent dividend paid was $1.65 per share and the appropriate discount rate is 9 percent, what how much would you be willing to pay for a share of Greyhound’s stock today? Show your calculations.

Answer 1

Price is calculated as follows:

So the price we should pay for the stock is 101.72

Calculation table:

Year	CF	Discount Factor			Discounted CF
1	$     2.15	1/(1+0.09)^1=		0.917431193	0.91743119266055*2.145=	1.97
2	$     2.79	1/(1+0.09)^2=		0.841679993	0.84167999326656*2.7885=	2.35
3	$     3.12	1/(1+0.09)^3=		0.77218348	0.772183480061064*3.12312=	2.41
4	$     3.50	1/(1+0.09)^4=		0.708425211	0.708425211065196*3.4978944=	2.48
5	$     3.92	1/(1+0.09)^5=		0.649931386	0.649931386298345*3.917641728=	2.55
5	$138.42	1/(1+0.09)^5=		0.649931386	0.649931386298345*138.423341056=	89.97
					NPV = Sum of all Discounted CF	101.72