Upper Gullies Corp just paid a dividend of 270 per share The

Upper Gullies Corp. just paid a dividend of $2.70 per share. The dividends are expected to grow at 19 percent for the next eight years and then level off to a 7 percent growth rate indefinitely. If the required return is 14 percent, what is the price of the stock today? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Solution

Price of stock today= Present value of all the dividend till 8th year+ Present value divident from 9th year till perpetuity

Present value of all the dividend till 8th year= (2.70*(1.19))/1.14+(2.70*(1.19^2))/1.14^2+(2.70*(1.19)^3)/1.14^3+(2.70*(1.19)^4)/1.14^4+(2.70*(1.19)^5)/1.14^5+(2.70*(1.19)^6)/1.14^6+(2.70*(1.19)^7)/1.14^7+(2.70*(1.19)^8)/1.14^8

= $26.33

Present value divident from 9th year till perpetuity= (((2.70*(1.19)^8)*1.07)/0.14-0.07)/1.14^8 =$58.18

Price of the stock today = $84.51