A7X Corp. just paid a dividend of $1.70 per share. The dividends are expected to grow at 20 percent for the next eight years and then level off to a growth rate of 5 percent indefinitely. If the required return is 15 percent, what is the price of the stock today

Dn = Do x (1+g)^n

D1 = 1.70 x (1+0.20)^1  = 2.04

D2 = 1.70 x (1+0.20)^2 = 2.448

Year  Dividend

1            2.040

2          2.448

3            2.938

4            3.525

5            4.230

6            5.076

7            6.091

8            7.310

Price at the end of 8th year = D8 x (1+g)/(Ke- g)

Price at the end of 8th year = 7.310 x (1+0.05)/ (0.15-0.05)

Price at the end of 8th year = $76.755

Year     Cash flows    PV Factor 15%     Present Value

1                2.040           0.8696                  1.77

2 .             2.448             0.7561                  1.85

3               2.938             0.6575                  1.93

4               3.525             0.5718                  2.02

5 .             4.230              0.4972                  2.10

6               5.076              0.4323                  2.19

7                6.091              0.3759                  2.29

8                84.065           0.3269                 27.48  

Total                                                            41.64

Hence,  the price of the stock today is $41.64

answer; organizational;