Assume today is December 31, 2013. Imagine Works Inc. just paid a dividend of $1
ID: 2758656 • Letter: A
Question
Assume today is December 31, 2013. Imagine Works Inc. just paid a dividend of $1.10 per share at the end of 2013. The dividend is expected to grow at 18% per year for 3 years, after which time it is expected to grow at a constant rate of 5% annually. The company's cost of equity (rs) is 9%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company's stock today (December 31, 2013)? Round your answer to the nearest cent. Do not round intermediate calculations.
Explanation / Answer
Imagine Works Inc Details Year 0 Year 1 Year 2 Year 3 Year 4 Expected Dividend Growth rate 18% 18% 18% 5% Dividend per share 1.10 1.30 1.53 1.81 1.90 Terminal Value of Dividends at Year 4 end= 1.90*1.05/(0.09-0.05)= 49.81 Expected Future Cash Flows 1.30 1.53 1.81 51.71 PV Factor @ 9% 1 0.917 0.842 0.772 0.708 PV of Future Cash flows 1.19 1.29 1.40 36.63 Total of PV of Future Cash flows $ 40.51 Stock Price Today is $40.51