Question

Lawrence​ Industries' most recent annual dividend was ​$1.09 per share ​(D0equals=$1.09​), and the​ firm's required return is 13​%. Find the market value of​ Lawrence's shares when dividends are expected to grow at 10​% annually for 3​ years, followed by a 66​% constant annual growth rate in years 4 to infinity.

The market value of​ Lawrence's shares is....

Answer 1

	CALCUALTION OF D1,D2,D3 & D4
				Last Dividend	Growth Rate	Dividend of the year
	D0=					1.09
	Dividend after the Year 1= D1			$                     1.09	10%	$                            1.20
	Dividend after the Year 2 = D2			$                     1.20	10%	$                            1.32
	Dividend after the Year 3 = D3			$                     1.32	10%	$                            1.45
	Dividend after the Year 4 = D4			$                     1.45	6%	$                            1.54
	CALCULATION OF THE VALUE OF THE STOCK AT THE END OF Third YEAR
	Formula	P3 = D4 / Ke - g
	Ke = Cost of Equity = Expected return = 13% = 0.13
	g = Growth rate = 6% = 0.06
	P3 = price of the stock at the end of 3rd year
		P3 = D4 / Ke - g
		P3 = $ 1.54 / 0.13 - 0.06
		P3 = $ 1.54 / 0.07
		P3 = $ 21.97
	CALCLATION OF PRESENT VALUE OF THE STOCK
		Year	Dividend	PVF @ 13%	Present Value
		1	$                      1.20	0.88496	$                          1.06
		2	$                      1.32	0.78315	$                          1.03
		3	$                      1.45	0.69305	$                          1.01
	Stock Value P3	3	$                    21.97	0.69305	$                        15.23
			Total		$                        18.33
	Answer = Market Value of the Stock = $ 18.33