Question

The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be constant at 42.5% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?

Answer 1

As per dividend discount method, current stock price is the present value of dividends.
Step-1:Present value of next 3 year's dividend
	Year	Dividend	Present value of 1	Present value of dividend
	a	b	c=1.11^-a	d=b*c
	1	$       1.78	0.9009	$                  1.60
	2	$       2.54	0.8116	$                  2.06
	3	$       3.62	0.7312	$                  2.65
	Total			$                  6.31
	Working:
	Year 1 dividend		=	1.25*1.425	=	$       1.78
	Year 2 dividend		=	1.78*1.425	=	$       2.54
	Year 3 dividend		=	2.54*1.425	=	$       3.62
Step-2:Terminal value of dividend at the end of year 3
	Terminal Value		=	D3*(1+g)/(Ke-g)		Where,
			=	3.62*(1+0.06)/(0.11-0.06)		D3	Year 3 dividend		$       3.62
			=	$                76.74		g	Growth rate		6%
						Ke	Required Return		11%
Step-3:Present value of terminal value
	Present value		=	Terminal value at the end of Year 3*Present value of 1
			=	$                76.74	*	0.7312
			=	$                56.11
	Working:
	Present value of 1		=	(1+i)^-n		Where,
			=	(1+0.11)^-3		i	11%
			=	0.7312		n	3
Step-4:Present value of all dividends
	Present value of all dividends			=	$       6.31	+	$    56.11
				=	$    62.42
As present value of dividends is $ 62.42. So, current stock price is $ 62.42.