Homework SourseThirsty Cactus Corp just paid a dividend of 125 per share Th
Thirsty Cactus Corp. just paid a dividend of $1.25 per share. The dividends are expected to grow at 40 percent for the next 10 years and then level off to a 7 percent growth rate indefinitely. Required : If the required return is 12 percent, what is the price of the stock today?
$301.09
$295.06
$307.11
$249.13
$5.85
Solution
Year 1 dividend = 1.25 * 1.4 = 1.75
Year 2 dividend = 1.75 * 1.4 = 2.45
Year 3 dividend = 2.45 * 1.4 = 3.43
year 4 dividend = 3.43 * 1.4 = 4.802
year 5 dividend = 4.802 * 1.4 = 6.7228
year 6 dividend = 6.7228 * 1.4 = 9.41192
year 7 dividend = 9.41192 * 1.4 = 13.176688
year 8 dividend = 13.176688 * 1.4 = 18.447363
year 9 dividend = 18.447363 * 1.4 = 25.826308
year 10 dividend = 25.826308 * 1.4 = 36.156832
year 11 dividend = 36.156832 * 1.07 = 38.68781
Present value at year 10 using dividend discount model = D1 / require rate - growth rate
Present value at year 10 = 38.68781 / 0.12 - 0.07
Present value at year 10 = 38.68781 / 0.05
Present value at year 10 = 773.756205
Present value of 1,012.3913 today = 773.756205 / ( 1 + 0.12)10
Present value of 1,012.3913 today = 249.12879
Present value of year 10 dividend = 36.156832 / ( 1 + 0.12)10 = 11.641532
Present value of year 9 dividend = 25.826308 / ( 1 + 0.12)9 = 9.313226
Present value of year 8 dividend = 18.447363 / ( 1 + 0.12)8 = 7.450581
Present value of year 7 dividend = 13.176688 / ( 1 + 0.12)7 = 5.960464
Present value of year 6 dividend = 9.41192 / ( 1 + 0.12)6 = 4.768372
Present value of year 5 dividend = 6.7228 / ( 1 + 0.12)5 = 3.814697
Present value of year 4 dividend = 4.802 / ( 1 + 0.12)4 = 3.051758
Present value of year 3 dividend = 3.43 / ( 1 + 0.12)3 = 2.441406
Present value of year 2 dividend = 2.45 / ( 1 + 0.12)2 = 1.953125
Present value of year 1 dividend = 1.75 / ( 1 + 0.12) = 1.5625
Price of stock = 1.5625 + 1.953125 + 2.441406 + 3.051758 + 3.814697 + 4.768372 + 5.960464 + 7.450581 + 9.313226 + 11.641532 + 249.12879
Price of stock = $301.09
