Question

Global Tek is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 15 percent a year for the next four years and then decreasing the growth rate to 3.5 percent per year. The company just paid its annual dividend in the amount of $.20 per share. What is the current value of one share of this stock if the required rate of return is 15.5 percent?

Please show all steps.. I'm unsure if this is a cash flow question for my calculator? Thanks!

Answer 1

year	Dividend	present value factor at 15.5%	Dividend * present value factor
1	.20(1+.15)= .23	.86580	.1991
2	.23(1+.15)= .2645	.74961	.1983
3	.2645(1+.15)= .304175	.64901	.1974
4	.304175(1+.15)= .34980125	.56192	.1966
4-Terminal value	3.01704	.56192	1.6953
Current value per share			2.4867   (rounded to 2.49)

Working :

Terminal value =D4(1+g)/(rs-g)

                  = .34980125 (1+.035)/ (.155-.035)

                  = .34980125 * 1.035/ .12

                 = 3.01704

Find present value factor using the formula 1/(1+i)^n where i =15.5% and n =1,2,3,4