Q. Current company dividends are $2 per share (Do). The dividend is expected to grow at 20% per year for next three years (Gs) and then 6% per year for the foreseeable future. You demand a required rate of return of 10%. What would you pay for a share of this stock?
So, I figured out the D1, D2, D3 using the supernormal growth rate and then figured out the present value of D4 to infinity and came up with $85.05...but got 3 points deducted by my instructor without explanation.
I had D1 = Do(1 + Gs) = $2.40 and PV of this is $2.18
D2 = D1(1+Gs) = $2.88 and PV of this is $2.38
D3 = $3.456 plus the present value of D4 to infinity = $107.136 whose PV = $80.49
$2.18 + $2.38 + $80.49 = $85.05.
Not sure where I messed this up...ideas?
So, I figured out the D1, D2, D3 using the supernormal growth rate and then figured out the present value of D4 to infinity and came up with $85.05...but got 3 points deducted by my instructor without explanation.
I had D1 = Do(1 + Gs) = $2.40 and PV of this is $2.18
D2 = D1(1+Gs) = $2.88 and PV of this is $2.38
D3 = $3.456 plus the present value of D4 to infinity = $107.136 whose PV = $80.49
$2.18 + $2.38 + $80.49 = $85.05.
Not sure where I messed this up...ideas?