Question

Huang Company's last dividend was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rateof 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?

Answer 1

We need to calculate each dividend payment and do it by multiplying it by 15% growth for three years. We get those dividends which are below. But thesefuture payments must be discounted to the present using 11% rate. Which is:

D/(1+r)^t where t is the time.

We get our three discounted dividend payments. Now we need to find the terminal value. That is equal to:

D(3)/(r-g) where D(3) is the third dividend (not discounted!) and r is required return and g is growth rate. We then must take this terminal value anddiscount is back 3 periods at 11% to get 29.46. Finally we add each dividend up plus terminal to get the total value which is $33.50