Question

Lawrence Industries most recent annual dividend was $1.80 per share and the firm's required return is 11%.

If dividends are expected to grow by 5% annually for 3 years and follows by a 2% constant growth rate in years 4 to infinity.

What is the valuation of Lawrence Industries stock today?

Answer 1

D1=(1.8*1.05)=1.89

D2=(1.89*1.05)=1.9845

D3=(1.9845*1.05)=2.083725

Value after year 3=(D3*Growth rate)/(Required rate-Growth rate)

=(2.083725*1.02)/(0.11-0.02)

=23.61555

Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=1.89/1.11+1.9845/1.11^2+2.083725/1.11^3+23.61555/1.11^3

=$22.10(Approx).