Question

The Casey Company is expected to pay a dividend of $1.60 in one year (i.e., at t=1); thereafter, company dividends are expected to grow at 10% per year for the four years after that (i.e., t=2 through t=5). After t=5 (i.e., beginning at t=6) dividends will grow at 3% per year, forever. The opportunity cost of capital is 12%, what is the current price of the common stock?

Answer 1

D(t+1) = D(t)*(1+g1)
D1	1.6
For the next four years
g	0.1
D2	1.76
D3	1.936
D4	2.1296
D5	2.34256
Starting from year t=6
g	0.03
D6	2.412837
D7	2.485222
P6	D7/(R-g)
P6	2.485222/(.12-.03)
P6	27.61358
Cash flow in year 6	P6+D6
Cash flow in year 6	30.02641
The price of the stock today = sum of present values of future cas flows.
Using R = .12
Year	1	2	3	4	5	6
cash flow	1.6	1.76	1.936	2.1296	2.34256	30.02641
present value	1.428571	1.403061	1.378007	1.353399	1.329231	15.21232
sum of present values	22.10459
The current price of the common stock is $22.10.