Question

solve by hand please

32. Non-Constant Growth (L01) Holyrood Co. just paid a dividend of $2.45 per share. The company will increase its dividend by 20% next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5% dividend growth, after which the company will keep a constant growth rate forever. If the required return on Holyrood stock is 11%, what will a share of stock sell for today?

Answer 1

present value factor = 1 /(1+r)^n

here,

r = 11%

=>0.11.

n=1,2,3,4....

year	cash flow	PV factor	cash flow * PV factor
1	2.45+20%=>2.94	1/(1.11)^1=>0.9009	2.648646
2	2.94+15%=>3.381	1/(1.11)^2=>0.8116	2.7440196
3	3.381+10%=>3.7191	1/(1.11)^3=>0.7312	2.7194
3	64.08425 (see note)	1/(1.11)^3=>0.7312	47.5896
		price of the stock	$55.70.

working:

value at end of year 3 , using constant growth model.

year 3 dividend*(1+ growth rate) / (required rate - growth rate)

=>3.7191*(1+0.05) / (0.11-0.05)

=>64.08425.