Question

You’ve collected the following information from your favorite financial website.

52-Week Price		Stock (Cur div)	Div Yld %	PE Ratio	Close Price	Net Chg
Hi	Lo
77.40	10.43	Palm Coal .36	2.6	6	13.90	–.24
55.81	33.42	Lake Lead Grp 1.54	3.8	10	40.43	–.01
130.94	69.55	SIR 2.05	2.3	10	88.98	3.07
50.24	13.95	DR Dime .80	5.2	6	15.43	–.26
35.00	20.74	Candy Galore .32	1.5	28	??	.18

According to your research, the growth rate in dividends for SIR for the next five years is expected to be 20 percent. Suppose SIR meets this growth rate in dividends for the next five years and then the dividend growth rate falls to 5.25 percent indefinitely. Assume investors require a return of 12 percent on SIR stock.

According to the dividend growth model, what should the stock price be today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
Current stock price            $

Answer 1

Year 0 dividend = Dividend yield * Closing price

= 2.3%*88.98

= 2.04654

Accordingly the dividends in 6 years are as below using various growth rates

Year	Dividend
0	2.04654
1	2.455848
2	2.947018
3	3.536421
4	4.243705
5	5.092446
6	5.3598

Horizon value = P5 = D6/(k-g)

= 5.3598/ (12%-5.25%) = $79.404

Stock price = discounted value of dividends and horizon value

= $ 57.7

WORKINGS