Non- constant growth A stock is expected to pay a dividend of $8 next year and...
Non- constant growth
A stock is expected to pay a dividend of $8 next year and this will increase by $2 for each of the following 3 years. after that, the company is expected to pay no dividends to its shareholders. if the required rate of return is 11% on this stock, what is the current stock price?
Homework Answers
| Stock | |||||
| Discount rate | 0.11 | ||||
| Year | 0 | 1 | 2 | 3 | 4 |
| Cash flow stream | 0 | 8 | 10 | 12 | 14 |
| Discounting factor | 1 | 1.11 | 1.2321 | 1.367631 | 1.5180704 |
| Discounted cash flows project | 0 | 7.207207 | 8.116224 | 8.774297 | 9.2222336 |
| NPV = Sum of discounted cash flows | |||||
| NPV Stock = | 33.32 | ||||
| Where | |||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||
| Discounted Cashflow= | Cash flow stream/discounting factor | ||||
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Non- constant growth
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