Assume today is December 31, 2013. Imagine Works Inc. just paid a dividend of $1.20 per share at the end of 2013. The dividend is expected to grow at 15% per year for 3 years, after which time it is expected to grow at a constant rate of 6% annually. The company's cost of equity (rs) is 9.5%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company's stock today (December 31, 2013)?

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aquialaska aquialaska · Answer 1 · 2020-04-09T03:26:51+02:00

Answer:

$36.41(Approx)

Explanation:

The computation of price of the company's stock is shown below:-

Dividend for 1 year = $1.2 × 1.15

= $1.38

Dividend for 2 year = $1.38 × 1.15

= $1.587

Dividend for 3 year = $1.587 × 1.15

= $1.82505

After 3 years value = (Dividend for 3 year × Growth Rate) ÷ Cost of equity - Growth Rate)

=($1.82505 × $1.05) ÷ (0.095-0.05)

=$42.5845

Current value of stock = Future dividends × Present value of discounting factor(rate in percentage,time period)

= $1.38 ÷ 1.095 + $1.587 ÷ 1.095^2 + $1.82505 ÷ 1.095^3 + $42.5845 ÷ 1.095^3

= $36.41(Approx)