XYZ Corp just paid an annual dividend of 3 per share on its

XYZ Corp. just paid an annual dividend of $3 per share on its common stock. This
dividend is expected to grow at a 10% annual rate for two years, after which it is
expected to grow at a 6% annual rate forever. If the required return is 10%, what value
would you place on this stock?

Solution

a) Calculation of Projected Dividend

Present value of dividend for first two years

Growth rate after 2nd year = 6 %

Price at 2 year = Dividend 3 / Ke - Growth rate

                       = 3.85/ 10-6 %

                     = 96.25

Present value at T=0

                                  = 96.25 * .826

                                  = 79.54 $

Therefore value a stock = Present value of dividend of 2 year + Present value of dividend growing 6 % infinite

                                         = 6 + 79.54

                                         = 85.55 $