ABC Company's last dividend was $0.6. The dividend growth rate is expected to be constant at 7% for 4 years, after which dividends are expected to grow at a rate of 5% forever. The firm's required return (rs) is 19%. What is its current stock price (i.e. solve for Po)?
Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
| Year |
Dividend (D*g^n) |
PVIF @ 19% | PV of Dividneds |
| 1 | 0.642 | 0.8403 | 0.539 |
| 2 | 0.687 | 0.7062 | 0.485 |
| 3 | 0.735 | 0.5934 | 0.436 |
| 4 | 0.786 | 0.4987 | 0.392 |
| Total | 1.853 |
P4 = Price at the end of Year 4
D5 = Dividend for Year 5 = Dividend for Year 4*1.05 = 0.826
Ke = Firm's Required Rate of Return
g = Growth in rate of Dividend
P0 = Current Stock Price
P4 = D5 / (Ke-g) = 0.826 / (0.19-0.05) = 0.826 / 0.14 = 5.90
P0 = PV of Price at the end of Year 4 + PV of Dividends till year 4
= 5.90 / (1.19^4) + 1.853
= 2.942 + 1.853
= 4.795
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