Question

Thirsty Cactus Corp. just paid a dividend of $2.20 per share. The dividends are expected to grow at 22 percent for the next eight years and then level off to a growth rate of 7 percent indefinitely. If the required return is 14 percent, what is the price of the stock today?

Answer 1

Future value $\mathrm{FVn} = (1 + q)^n$ , where $n$ - year, $q$ - grow rate for 1-8 years

Present value $\mathrm{PVn} = 1 / (1 + r)^n$ , $r$ - required return

$\mathrm{D0^{*}FV = Dn^{*}PV}$ , D - dividend

$\mathrm{Dn} = \mathrm{D0^{*}FVn}$

Discounted income $= \mathrm{Dn^{*}PVn}$

Pshare (after year 8) = D0*(1+q9)/(r - q9), where q9 is grow rate after year 8.

Pcorrected = Pshare*PV8 + Total DI, it is the price of the stock today.