Assume today is December 31 2013 Imagine Works Inc just paid

Assume today is December 31, 2013. Imagine Works Inc. just paid a dividend of $1.30 per share at the end of 2013. The dividend is expected to grow at 12% per year for 3 years, after which time it is expected to grow at a constant rate of 5% annually. The company\'s cost of equity (rs) is 10%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company\'s stock today (December 31, 2013)? Round your answer to the nearest cent. Do not round intermediate calculations.

Solution

D1=(1.3*1.12)=$1.456

D2=(1.456*1.12)=$1.63072

D3=(1.63072*1.12)=$1.8264064

Value after yer 3=(D3*Growth rate)/(Cost of equity-Growth rate)

=(1.8264064*1.05)/(0.1-0.05)=$38.3545344

Hence value of stock today=Future dividends*Present value of discounting factor(10%,time period)

=$1.456/1.1+$1.63072/1.1^2+$1.8264064/1.1^3+$38.3545344/1.1^3

which is equal to

=$32.86(Approx).