Question

Divided Health Group (DHG) expects to pay a dividend of $3 at the end of the year. The dividend growth rate is expected to be 10% per year until 3 years from now (t=3). After that, the growth rate will remain constant at 5% per year. The required rate of returns is 11%. What is the price of DHG stock today?

Answer 1

	Required rate=	11.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	3		3	1.11	2.7027
2	3	10.00%	3.3		3.3	1.2321	2.67835
3	3.3	10.00%	3.63	63.525	67.155	1.367631	49.10316
	Long term growth rate (given)=	5.00%			Value of Stock =	Sum of discounted value =	54.48
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
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