I would like help with solving a supernormal calculation/valuation and dividend

Question

I would like help with solving a supernormal calculation/valuation and dividend growth rates.

Company X is expanding rapidly, and it currently needs to retain all of its earnings, hence it does not pay any dividends.  However, investors expect Company X to begin paying dividends, with the first dividend D2coming 2 years from today.  The dividend should grow rapidly--at a rate of g3,4 per year--during years 3 and 4.  After year 4, the company should grow at a constant rate of g per year.  If the required return on the stock is rs, what is the value of the stock today (P0)?

Explanation / Answer

Year 0 Year 1 Year 2 Year 3 Year 4 Perpetuity Dividend          1.81          2.26          2.83           2.93 Growth Rate 25% 25% 3.50% Interest Rate 14% 14% 14% 14% Present value of dividends          1.39          1.53          1.67 Terminal Value       27.88 Present value of Terminal Value       16.51 Total present value                  21.10

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