7. A company recently paid a dividend of $1.20 per share. It is estimated that the company’s dividend will grow at the rate of 15% per year for the next 5 years, then at a constant rate of 7% a year thereafter. The required return on this company is 8.80%, what is the estimated stock price today?(8)
HI
Recent dividend D0 = $1.2
5 years growth rate g1 = 15%
perpetual growth rate g = 7%
required rate of return k = 8.8%
As per dividend discount model, current share price will equal to present value of future dividend of company
hence Estimated stock price today = D0*(1+g1)/(1+r) + D0*(1+g1)^2/(1+r)^2 + D0*(1+g1)^3/(1+r)^3 + D0*(1+g1)^4/(1+r)^4+D0*(1+g1)^5/(1+r)^5 + D0*(1+g1)^5*(1+g)/(r-g)(1+r)^5
= 1.2*(1+15%)/(1+8.8%) + 1.2*(1+15%)^2/(1+8.8%)^2 +1.2*(1+15%)^3/(1+8.8%)^3 +1.2*(1+15%)^4/(1+8.8%)^4 +1.2*(1+15%)^5/(1+8.8%)^5 +1.2*(1+15%)^5*(1+7%)/(8.8%-7%)(1+8.8%)^5
=$101.22
Thanks
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