What should current Kroger stocks price be if Kroger pays $1.50 as dividend per stock for thisyear? Kroger expects future dividend to grow at 4% constantly for the first two years from nowthen to grow at 2% constantly for the rest of firm's life. The required rate of return for stock is10%

D0 = $1.50

g = 4% for the first two years

g = 2% for the rest of firm's life

rs = 10%

1. Find Kroger's price at year 2 when dividend becomes constant at 2%, using Discountdividend model

First of all, why do we have to find the price at year 2? It is because year 2 is the year

when the dividend has the constant growth rate in dividend. Hence, we should be able

to compute the price of stock at year 2 (P2), under the Constant Dividend Growth

Model. This computed price is called as Horizontal or Terminal Value.

2. Find Kroger's price at year 0, using dividends at year 1 and 2 and P2 as future cash flow.

Now, we have to compute the current price of stock. However, since future cash flows

(Dividends) are uneven and the growth rate of dividend is not constant, we cannot use

the Constant Dividend Growth Model. Instead, we have to compute the Present Values

of each cash flows in the future then sum PVs to find the current price of stock.