Question

View FUNCIES Current Attempt in Progress Ivanhoe, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a constant-growth rate of 8 percent is expected. The firm expects to pay its first dividend of $2.63 a year from now. If dividends will grow at the same rate as the firm and the required rate of return on stocks with similar risk is 17 percent, what is the current value of the stock? (Round all intermediate calculations and final answer to 2 decimal places, e.g. 15.20.) Current value $

Answer 1

Required Return (ke)=   17%  
Dividend and earnings growth rates are same.       

Next year dividend D1 =   2.63  
growth is 30% for next 2 years. First Dividend is inclusive of growth. Second Dividend (D2)= D1*(1+g)      
2.63*(1+30%)=   3.419  

Next 2 years Dividend Growth is   17%  
D3= 3.419*(1+17%)=   4.00023  
D4= 4.00023*(1+17%)=   4.6802691  

From 5th year onwards Constant Growth Rate (g)=   8%  
When Constant Growth arises. price of Stock is calculated using Constant Growth model formula.      

Constant Growth formula:      
Price of stock at end of Year (P4) = D4*(1+g)/(Ke -g)      
4.6802691*(1+8%)/(17%-8%)      
56.1632292      
      
Now value of stock today will be present value of Dividend received upto 4 year and price of Stock at end of 4th year (P4)      
      
      
Formula for Current price of stock = D1/(1+ke)^1 + D2/(1+ke)^2 + D3/(1+ke)^3 + D4/(1+ke)^4 + P4/(1+ke)^4      
=2.63/(1+17%)^1) + (3.419/(1+17%)^2) + (4.00023/(1+17%)^3) + (4.6802691/(1+17%)^4)+(56.1632292/(1+17%)^4)      
=$39.71      
      
So current value of stock is    $39.71