Quantitative Problem 3: Assume today is December 31, 2017. Imagine Works Inc. ju
ID: 2821894 • Letter: Q
Question
Quantitative Problem 3: Assume today is December 31, 2017. Imagine Works Inc. just paid a dividend of $1.35 per share at the end of 2017. The dividend is expected to grow at 12% 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, 2017)? Round your answer to the nearest cent. Do not round intermediate calculations.
Explanation / Answer
D1=(1.35*1.12)=$1.512
D2=(1.512*1.12)=$1.69344
D3=(1.69344*1.12)=$1.8966528
Value after year 3=(D3*Growth rate)/(Cost of equity-Growth rate)
=(1.8966528*1.05)/(0.09-0.05)
=$49.787136
Hence current price=Future dividend*Present value of discounting factor(9%,time period)
=$1.512/1.09+$1.69344/1.09^2+$1.8966528/1.09^3+$49.787136/1.09^3
which is equal to
=$42.72(Approx).