Answer to Question #197354 in Financial Math for Tehseen

Question

A company paid dividend $12. Company is expected to grow the dividend at 10% per year for next 3 years and then at 6% per year forever. What is the price of stock at the end of third year if your discount rate is 14%? 

Answer 1

After-tax yield = Rate on the taxable bond x ( Tax rate-1)

annual dividend income on $12 shares would be total of rate amount

$(14+10+6)\% x \$12=> \frac{30}{100}×12 =(0.3×12)$

$= 3.6×( tax\space rate -1)$

$=> 3.6×(3-1) = (3.6×2)= \$7.2$

it will be $7.2 price of stock at the end of third year if the discount rate is 14%