Question

XYZ company will pay dividend next year of $4.20 per share. The growth rate is constant at 6% and the required return is 10%. What is the price of abc stock at year 5?

Answer 1

Total = Value of stock today = 111.30

Year	Growth	Dividend Cash flow	Price of stock*	Net cash inflow	Discounting = Df	Present value
n	g	Dn = D0*(1+g)^n	Price of stock* = Dividend at end of period x (1+Constant growth)/(Required rate -Constant growth)	NF = Dn + P	Df = 1/(1+10%)^Year	=NF*Df
1	6.00%	4.45200000		4.45200	0.909091	4.04727
2	6.00%	4.71912000		4.71912	0.826446	3.90010
3	6.00%	5.00226720		5.00227	0.751315	3.75828
4	6.00%	5.30240323		5.30240	0.683013	3.62161
5	6.00%	5.62054743	148.94451	154.56505	0.620921	95.97274
				Total = Value of stock today =		111.30

Price of stock* = Dividend at end of period x (1+Constant growth)/(Required rate -Constant growth)

= 5.62054743 x (1+6%)/(10%-6%)

= 148.94451