Question
In this scenario: Non-Constant growth stock Valuation Stewart Industries just paid a $3.00 per share dividend on its common stock yesterday (i.e., D 0 =
In this scenario:
Non-Constant growth stock Valuation Stewart Industries just paid a $3.00 per share dividend on its common stock yesterday (i.e., D0= $3.00). The dividend is expected to grow 20 percent a year for the next four years, after which time the dividend is expected to grow at a constant rate of 5 percent a year for ever.You assume a 14 percent discount rate.
1) What is the price of the stock at the end of year 4
2) What should be the stock price today
How is this the answer?
price after 4 years=((3*1.20^1)/1.14^1+(3*1.20^2)/1.14^2+(3*1.20^3)/1.14^3+(3*1.20^4)/1.14^4+((3*1.20^4*1.05)/(0.14-0.05))/1.14^4)*1.20^4=117.44
stock price today=((3*1.2^1)/1.14^1+(3*1.2^2)/1.14^2+(3*1.2^3)/1.14^3+(3*1.2^4)/1.14^4+((3*1.2^4*1.05)/(0.14-0.05))/1.14^4)=56.64
Where are the 1.20 and 1.14 coming from?Please help me break this down into a formula. Thank you.
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