To find the value of stock, we discount the expected cash flows of the stock to the present value.
Dividend for Year 1 = 1.6* (1+20% Growth) = 1.92
Year 2 = 1.92 *1.15= 2.208
Year 3 = 2.208*1.10 = 2.4288
Year 4 = 2.4288 * 1.05 = 2.5502
Value of Share at end of Year 4 using Dividend Discount Model = 2.5502 * (1+ Growth ) / (Ke - Growth)
= 2.5502* 1.05 / (17%-5%)
= 22.3146
Now we discount all tha above cash flows at present value.
DF for each year = 1 / (1+ 17%)^ N
Year | Cash Flows | DF | PV |
1 | 1.92 | 0.8547 | 1.64 |
2 | 2.208 | 0.7305 | 1.61 |
3 | 2.4288 | 0.6244 | 1.52 |
4 | 2.55024 | 0.5337 | 1.36 |
4 | 22.3146 | 0.5337 | 11.91 |
18.04 |
We get the value of stock as $18.04
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