Question

Jim Cramer of CNBC recently commented that Amazon (AMZN) will start paying dividends in the mediumterm

future because of all of the cash flow that it generates (coupled with a cash balance in excess of $20 billion).

When pressed on the issue, Jim made a bold forecast that Amazon will start paying its first dividend 6 years from now

in the amount of $91.50 per share. Jim also projected that the dividends would grow, over the following 4 years, by

15.00% per year, after which the growth rate would be a constant rate of 6.00%/year, forever. If the appropriate

required return (also called discount rate, because we use it for discounting!) for AMZN's stock is 10.0%, what should

today’s stock price be based on discounted valuation of the future dividends that Cramer has projected?

Answer 1

Answer:

Today’s stock price be based on discounted valuation of the future dividend = $1,917.87

Working:

2 8 9 11 Onwards Year 0 1 4 5 6 7 10 Dividend growth 15.00% 15.00% 15.00% 15.00% 6% $0 $0 $0 $0 $105.2250 $121.0088 $139.1601 $160.0341 Dividend $0 $91.50 $169.6361 Terminal value at the end of year 10 (Dividend at year 11/ (10% - 6%)) Cash Flows PV factor (1/(1+10%)^year $4,240.9029 $91.50 $105.2250 $121.0088 $139.1601 $4,400.9370 $0 S0 $0 S0 SC 0.62092 0.82645 0.90909 0.75131 0.68301 0.56447 0.51316 0.46651 0.42410 0.38554 PV of cash flows $0 S0 SC $0 $54.00 $56.45 $59.02 $51.65 $1,696.75 Today's stock price $1,917.87