Question

Phoenix Industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $1 per share dividend to be paid a year from now, the first dividend since the crisis. Analysts expect dividends to increase by $1 a year for another 2 years. After the third year (in which dividends are $3 per share) dividend growth is expected to settle down to a more moderate long- term growth rate of 5%. If the firm's investors expect to earn a return of 15% on this stock, what must be its price? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Current price

Answer 1

	Required rate=	15.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	1		1	1.15	0.8696
2	1	0.00%	2		2	1.3225	1.51229
3	2	0.00%	3	31.5	34.5	1.520875	22.68431
	Long term growth rate (given)=	5.00%			Value of Stock =	Sum of discounted value =	25.07
Where
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor