=1.60(1.20) = 1.92
D2 = D1(1.20)
D3 = D2(1.20)
D4 = D3(1.20)
D5 = D4(1.13)
D6 = D5(1.13)
D7 = D6(1.13)
D8 = D7(1.13)
D9 = D8(1.07)
and you need the 10th dividend D10 = D9(1.07) to calculate the terminal price
2) calculate terminal price, e.g. the price IN year 9 "P9" based on the year 10 and forward constant dividend growth rate
Use the Gordon growth model...
P9 = D10 / (r - g)
= D10 / (0.16 - 0.07)
= D10 / 0.09
3) Price today,"P0" = the sum of the discounted cash flows, e.g.
D1/ 1.16 + D2 / 1.16^2 + D3 / 1.16^3 + ....+ D8 / 1.16^8 + D9 / 1.16^9 + P9 / 1.16^9 <<
(The "+...+" means fill in the missing discounted dividends, e.g. 4 thru 7, where the "n" in (1.16^n) equals the dividend #)
Stellar Company is one of the renowned companies of the town, which deals in leather items. The product line of the company ranges from a leather keychain to leather jackets. The company currently pays a dividend of Rs. 1.60 per share on its common stock and it expects to increase the dividend at a 20% annual rate for the first four years. From year 5 to 8, the company expects to increase the dividend at a rate of 13% and thereafter expects to grow at a rate of 7%. The company has set this particular growth pattern by keeping the expected life cycle of earnings into consideration.
Required:
What value should you place on a share of this stock if your nominal annual required rate of return is 16%?
I need help solving the question
