Question

A stock will pay no dividends for the next 3 years. Four years from now, the stock is expected to pay its first dividend in the amount of $2.1. It is expected to pay a dividend of $2.9 exactly five years from now. The dividend is expected to grow at a rate of 5% per year forever after that point. The required return on the stock is 14%. The stock's estimated price per share exactly TWO years from now, P2 , should be $______. Do not round any intermediate work, but round your final answer to 2 decimal places (ex: $12.34567 should be entered as 12.35). Margin of error for correct responses: +/- .10.

Answer 1

	Required rate=	14.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	0		0	1.14	0
2	0	0.00%	0		0	1.3	0
3	0	0.00%	0		0	1.482	0
4	0	0.00%	2.1		2.1	1.689	1.24334
5	2.1	0.00%	2.9	33.833	36.733	1.925	19.08208
	Long term growth rate (given)=	5.00%			Value of Stock =	Sum of discounted value =	20.33

Where
Current dividend =	Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend	+ horizon value (only for last year)
Horizon value =	Dividend Current year 5 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=	(1+ Required rate)^corresponding period
Discounted value=	total value/discount factor

value in 2 years = value today*(1+required rate)^2 = 20.33*(1+0.14)^2

=26.42