20 Given the following earnings and dividends an 85 discount

20. Given the following earnings and dividends, an 8.5% discount rate and a of 5%, which begins in year 6, what is the value of the stock? rate and a perpetual growth rate Year : Earnings Dividends 3 7.76 4.27 7.12 5.50 3.03 3.30 6.53 3.59 6.00 3.92

Solution

Terminal value at end of year5 =D5(1+growth)/(Rs-g)

          = 4.27[1+.05]/[.085-.05]

          = 4.27 *1.05 /.035

          = 128.10

Value of stock = $ 99.27 per share

year	Dividend	PVF @8.5%	Dividend *PVF
1	3.03	.92166	2.7926
2	3.30	.84946	2.8032
3	3.59	.78291	2.8106
4	3.92	.72157	2.8286
5	4.27	.66505	2.8398
5	128.10	.66505	85.1929
Value of stock today			99.27