A7X Corp. just paid a dividend of $2.60 per share. The dividends are expected to grow at 18 percent for the next eight years and then level off to a growth rate of 7 percent indefinitely. If the required return is 13 percent, what is the price of the stock today? (Do not round intermediate calculations and round your answer to 2 decimal places)
The following need to be solved on Excel:
Solution:
1.Calculation of price of the stock today
First we need to find the dividend for each year till 9th year
Dividend for the year=Previous year dividend(1+growth rate)
Year | Dividend for year | |
1 | $2.60(1+0.18)=$3.068 | D1 |
2 | $3.068(1+0.18)=$3.62 | D2 |
3 | $3.62(1+0.18)=$4.27 | D3 |
4 | $4.27(1+0.18)=$5.04 | D4 |
5 | $5.04(1+.18)=$5.95 | D5 |
6 | $5.95(1+0.18)=$7.02 | D6 |
7 | $7.02(1+0.18)=$8.28 | D7 |
8 | $8.28(1+0.18)=$9.77 | D8 |
9 | $9.77(1+0.07)=$10.45 | D9 |
Terminal value at the end of 8th year(TV)=Dividend for 9the year/(Required return-Growth rate)
=$10.45/(0.13-0.07)
=$174.17
Stock price is the present value of dividends and terminal value.calculation is as follow;
Stock Price is;
=$3.068/(1+0.13)^1+$3.62/(1+0.13)^2+$4.27/(1+0.13)^3+$5.04/(1+0.13)^4+$5.95/(1+0.13)^5+$7.02/(1+0.13)^6+$8.28/(1+0.13)^7+$9.77/(1+0.13)^8+$174.17/(1+0.13)^8
=$90.91
therefore,price of the stock today is $90.91
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