The following growth rates for the next three years: 35 percent, 28 percent, and

Question

The following growth rates for the next three years: 35 percent, 28 percent, and 22 percent. The company then expects to grow at a constant rate of 9 percent forevever. The company paid a dividend of $2.09 last week. If the required rate of return is 16 percent, What is the value of this stock? ( Round intermediate Caculations and Final answer to 2 decimal places.) 1. Calculate the present value of the dividends during the fast-growth period? 2. what is the value of the stock at the end of the fast-growth period(P4)? 3. What is the value of the stock today? 4.Would today"s stock valuebe affected by the length of time you intend to hold the stock?

Explanation / Answer

You need to find the value of the stock in year 6 and discount that amount back to the present.


So:
The first year that we can use theGordon Growthmodel is year 6 since we know the following year's dividend. Plugging all information into the formula we get: $9/(.13-.05) = $112.50

You now have to discount that amount back to the present (time 0), which is 6 years: $112.50/1.13^6 = $54.04

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