Waterfront Solutions Inc paid a dividend of 500 per share on

Waterfront Solutions, Inc. paid a dividend of $5.00 per share on its common stock yesterday.
Dividends are expected to grow at a constant rate of 4% for the next two years, at which point
the stock is expected to sell for $56.00. If investors require a rate of return on Waterfront’s
common stock of 18%, what should the stock sell for today

Solution

D1=(5*1.04)=$5.2

D2=(5.2*1.04)=$5.408

Hence current value=Future dividends*Present value of discounting factor(18%,time period)

=5.2/1.18+5.408/1.18^2+56/1.18^2

which is equal to

=$48.51(Approx).