Question

Multistage Growth A firm projects that dividends will grow at a rate of 10% per year for four years and then will grow at a rate of 4% per year forever. The stock's required return is 12% and the last annual dividend paid was $1.50. The most an investor should be willing to pay for this stock today is ______. (Watch your rounding, carry out dividends to four or more decimal places.)

$23.88

$28.55

$27.22

$21.94

and explain

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	10.00%	1.815		1.815	1.2544	1.44691
3	1.815	10.00%	1.9965		1.9965	1.404928	1.42107
4	1.9965	10.00%	2.19615	28.55	30.74615	1.57351936	19.53973
	Long term growth rate (given)=	4.00%			Value of Stock =	Sum of discounted value =	23.88
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 4 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor