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Quantitative Problem 3: Assume today is December 31, 2019. Imagine Works Inc. just paid a dividend...

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Finance

Quantitative Problem 3: Assume today isDecember 31, 2019. Imagine Works Inc. just paid a dividend of $1.10per share at the end of 2019. The dividend is expected to grow at18% per year for 3 years, after which time it is expected to growat a constant rate of 6% annually. The company's cost of equity(rs) is 9%. Using the dividend growth model (allowingfor nonconstant growth), what should be the price of the company'sstock today (December 31, 2019)? Do not round intermediatecalculations. Round your answer to the nearest cent.
$   per share

Answer & Explanation Solved by verified expert
4.0 Ratings (602 Votes)

Required rate= 9.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 1.1 18.00% 1.298 1.298 1.09 1.1908
2 1.298 18.00% 1.53164 1.53164 1.1881 1.28915
3 1.53164 18.00% 1.8073352 63.859 65.6663352 1.295029 50.70646
Long term growth rate (given)= 6.00% Value of Stock = Sum of discounted value = 53.19
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

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