The value of the stock is computed as shown below:
= Dividend in year 1 / ( 1 + required rate of return
)1 + Dividend in year 2 / ( 1 + required rate of return
)2 + Dividend in year 3 / ( 1 + required rate of return
)3 + Dividend in year 4 / ( 1 + required rate of return
)4 + 1 / ( 1 + required rate of return )4 [
(Dividend in year 4 ( 1 + growth rate ) / ( required rate of return
- growth rate ) ]
= ( $ 3.20 x 1.18 ) / 1.0871 + ( $ 3.20 x
1.182 ) / 1.0872 + ( $ 3.20 x
1.183 ) / 1.0873 + ( $ 3.20 x
1.184 ) / 1.0874 + 1 /
1.0874 [ ( $ 3.20 x 1.184 x 1.06 )
/ ( 0.087 - 0.06 ) ]
= $ 3.776 / 1.0871 + $ 4.45568 / 1.0872 + $ 5.2577024 / 1.0873 + $ 6.204088832 / 1.0874 + $ 243.5679319 / 1.0874
= $ 190.24 Approximately
Feel free to ask in case of any query relating to this question
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