Notice that both approaches yield the same price in five years. In this scenario, we have supernormal growth for the next three years. We'll need to calculate the dividends during the rapid-growth period and the stock price in three years. The dividends are:

D1 = $2.00 X 1.20 = $2.400 D2 = $2.40 X 1.20 = $2.880 D3 = $2.88 X 1.20 = $3.456

After three years, the growth rate falls to 8 percent indefinitely. The price at that time, P3, is thus:

P3 = D3 X (1 + g)/(R - g) = $3.456 X 1.08/(.16 - .08) = $3.7325/.08 = $46.656

To complete the calculation of the stock's present value, we have to determine the present value of the three dividends and the future price:

Stocks and Shares Retirement Rescue

Stocks and Shares Retirement Rescue

Get All The Support And Guidance You Need To Be A Success At Investing In Stocks And Shares. This Book Is One Of The Most Valuable Resources In The World When It Comes To

Get My Free Ebook

Post a comment