Answer:
As per question dividend growth rate would 20% in year 1-4 and 5% in year 5 and thereafter.
Now, D1 = 1.64(1.20) = $1.968
D2 = $1.968(1.20) = $2.362
D3 = $2.362(1.20) = $2.834
D4 = $2.834(1.20) = $3.401 and,
D5 = $3.401(1.05)= $3.571
Now, here we can calculate P4 with the help of above D5:
P4 = D5 / r-g = $3.571 /(0.08-0.05) = $119.033
so, P4 = $119.033
Thus, Price of stock (P0) = Present value of all future benefits
P0 = Present value of D1, D2, D3, D4 and P4
= $1.968/1.08 + 2.362/(1.08)2 + 2.834(1.08)3 + 3.401(1.08)4 + 119.033(1.08)4
= $ 96.0896
Thus, price of stock = 96.1 (rounded to the nearest cent)
Answer:
96.08
Explanation:
First, we determine the Dividend for the 4 years.
The Just paid dividend = $1.64
Dividend Growth Rate = 20%
D1= P0(1+r)
Dividend for Year 1 (D1) = 1.64 (1.2) = $1.968
Dividend for Year 2 (D2) = 1.968(1.2) = $2.3616
Dividend for Year 3 (D3) = 2.3616 (1.2) = $2.8339
Dividend for Year 4 (D4) = 2.8339 (1.2) = $3.4007
Step 2: We determine the value after the 4th year based on the following formula
(D4 x Growth rate)/ (Required rate of retuurn - Growth Rate)
= ($3.4007 x 1.05)/ (0.08-0.05)
= 3.570735/0.03
= $119.0245
Step 3: We determine the current price as follows
Future Dividends x Present value of the Discounting Factor
The Present value of discounting factor will be based on (1+required rate of return)∧n
Present Value = (1.968/1.08)+(2.3616/1.08)^2 +(2.8339/1.08)^3 + (3.4007/1.08)^4+ ($119.025/1.08)^4
= 96.08
