Current value of stock. Given information: Current rate of dividend payment is $3 per share Expected growth of dividend is 15% (for next 3 years) Thereafter growth is 10% per year Expected increase in stock price is 40% Calculation of current value of stock: Year Earnings ($) Dividends ($) 0 3 0.00 1 3(1.15) 3.45 2 3.45(1.15) 3.968 3 3.97(1.15) 4.563 4 4.56(1.10) 5.019 P4 = 1.4(P0) Note the beginning of year 5 is the same as the end of year 4 in present value terms. P 0 = F V n ( P V I F i , n ) Here, FV refers to future value of investment, i is interest rate, n is number of periods, PVIF refers to a used for calculation. P 0 = $ 3.45 .893 + $ 3.968 .797 + $ 4.563 .712 + $ 5.019 .636 + 1.4 P 0 .636 = $ 115.73 Therefore, the value of stock will be $115.73

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Chapter 7, Problem 24P

Summary Introduction

To determine: Current value of stock.

Given information:

Current rate of dividend payment is $3 per share

Expected growth of dividend is 15% (for next 3 years)

Thereafter growth is 10% per year

Expected increase in stock price is 40%

Calculation of current value of stock:

Year Earnings ($) Dividends ($)
0 3 0.00
1 3(1.15) 3.45
2 3.45(1.15) 3.968
3 3.97(1.15) 4.563
4 4.56(1.10) 5.019

P4 = 1.4(P0)

Note the beginning of year 5 is the same as the end of year 4 in present value terms.

P0=FVn(PVIFi,n)

Here,

FV refers to future value of investment,

i is interest rate,

n is number of periods,

PVIF refers to a used for calculation.

P0=$3.45.893+$3.968.797+$4.563.712+$5.019.636+1.4P0.636=$115.73

Therefore, the value of stock will be $115.73

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