A fast growing firm recently paid a dividend of $0.15 per share. The dividend is

Question

A fast growing firm recently paid a dividend of $0.15 per share. The dividend is expected to increase at a 26 percent rate for the next four years. Afterwards, a more stable 11.5 percent growth rate can be assumed.

If a 14.0 percent discount rate is appropriate for this stock, what is its value? (Do not round your intermediate calculations and round your final answer to 2 decimal places. Omit the "$" sign in your response.)

A fast growing firm recently paid a dividend of $0.15 per share. The dividend is expected to increase at a 26 percent rate for the next four years. Afterwards, a more stable 11.5 percent growth rate can be assumed.

Explanation / Answer

Do = 0.15 per share

D1 = 0.15*126% i.e 0.189

D2 = 0.189*126% i.e 0.2381

D3 = 0.2381*126% i.e 0.3000

D4 = 0.3000*126% i.e 0.378

D5 = 0.378*111.5% i.e 0.4215

Price of the share = D1/(1+Ke)^1+D2/(1+Ke)^2+D3/(1+Ke)^3+D4/(1+Ke)^4+D5/Ke-G*1/(1+Ke)^5

= 0.189/(1+0.14)^1+0.2381/(1+0.14)^2+0.3000/(1+0.14)^3+0.378/(1+0.14)^4+0.4215/0.14-0.115*1/(1+0.14)^4

= 0.189*0.8772+0.2381*0.769+0.3000*0.675+0.378*0.592+0.422*0.519+0.4215/0.025*2.9137

= 0.1658+0.1831+0.2025+0.222+0.2190+4.9124

= 5.90

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