Question

You own a company that competes with Old World DVD Company (in the previous problem). Instead of selling DVDs, however, your company sells music downloads from a Web site. Things are going well now, but you know that it is only a matter of time before someone comes up with a better way to distribute music. Your company just paid a $1.50 per share dividend, and you expect to increase the dividend 10 percent next year. However, you then expect your dividend growth rate to begin going down—to 5 percent the following year, 2 percent the next year, and to −3 percent per year thereafter. Based on these estimates, what is the value of a share of your company's stock? Assume that the required rate of return is 12 percent. Explain with Formula!!!

Answer 1

	Required rate=	12.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1.5	10.00%	1.65		1.65	1.12	1.4732
2	1.65	5.00%	1.7325		1.7325	1.2544	1.38114
3	1.7325	2.00%	1.76715	11.428	13.19515	1.404928	9.39205
	Long term growth rate (given)=	-3.00%			Value of Stock =	Sum of discounted value =	12.25

Where
Current dividend =	Previous year dividend*(1+growth rate)^corresponding year
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

long term growth rate = -3%