Years 1-8
Growing annuity
PV = Pmt x (1 - (1 + g)^n x (1 + i)^-n ) / (i - g)
http://www.tvmschools.com/formula/presen...
Pmt = next dividend = 2.30 x 123% = 2.829
PV = 2.829 x (1 - (1 + 23%)^8 x (1 + 15%)^(-8) ) / (15% - 23%) = 25.20
Years 9 on-wards
Growing perpetuity
PV = Pmt / (i - g)
http://www.tvmschools.com/formula/presen...
Pmt = dividend at the end of year 9 = 2.30*(1+23%)^8*(1+7%) = 12.893
PV = 12.893 / (15% - 7%) = 161.162
This now needs discounting back to start of year 1
PV = 161.162/1.15^8
PV = 52.68
Total PV = 25.20 + 52.68 = 77.88 = Price
Thirsty Cactus Corp. just paid a dividend of $2.30 per share. The dividends are expected to grow at 23 percent for the next eight years and then level off to a growth rate of 7 percent indefinitely. If the required return is 15 percent, what is the price of the stock today?
