Chapter 7, Problem 24P

Summary Introduction

To determine: Current value of stock.

Given information:

Current rate of dividend payment is $3 per share

Expected growth of dividend is 15% (for next 3 years)

Thereafter growth is 10% per year

Expected increase in stock price is 40%

Calculation of current value of stock:

Year	Earnings ($)	Dividends ($)
0	3	0.00
1	3(1.15)	3.45
2	3.45(1.15)	3.968
3	3.97(1.15)	4.563
4	4.56(1.10)	5.019

P4 = 1.4(P0)  

Note the beginning of year 5 is the same as the end of year 4 in present value terms.

$P_0=\text{}F{V}_n(PVI{F}_{i,n})$

Here,

FV refers to future value of investment,

i is interest rate,

n is number of periods,

PVIF refers to a used for calculation.

$\begin{array}{c}{P}_0=\$3.45\left(.893\right)+\$3.968\left(.797\right)+\$4.563\left(.712\right)+\$5.019\left(.636\right)+1.4P_0\left(.636\right)\\ =\$115.73\end{array}$

Therefore, the value of stock will be $115.73