Question

Thirsty Cactus Corp. just paid a dividend of $1.35 per share. The dividends are expected to grow at 30 percent for the next 9 years and then level off to a 7 percent growth rate indefinitely. If the required return is 12 percent, what is the price of the stock today?

Answer 1

Step 1: Computation of market price at the end of year 9 using Gordon Growth Mdel

P9 = D10 / (Ke – g)

Where,

P9 – Share price at year 9 =?

D10 – Expected dividend in year 10 = 1.35*1.3^9*1.07 = 15.3181993443

Ke – Cost of equity = 12%

G – Growth rate in dividend = 7%

P9 = 15.3181993443/(.12-.07)

= 306.36

Step 2: Computing current share price by discounting the cashflow at required return

Year	Dividend	PVF@12%	Present Value (Cashflow*PVF)
1	1.76	0.8929	1.57
2	2.28	0.7972	1.82
3	2.97	0.7118	2.11
4	3.86	0.6355	2.45
5	5.01	0.5674	2.84
6	6.52	0.5066	3.30
7	8.47	0.4523	3.83
8	11.01	0.4039	4.45
9	320.68 (14.32+306.36)	0.3606	115.64

current share price = Cashflow*PVF

= $138.01

You can use the equation 1/(1+i)^n to find PVF using calculator