A fast growing firm recently paid a dividend of $1.00 per share. The dividend is expected to increase at a rate of 15 percent for the next 3 years. Afterwards, a more stable 6 percent growth rate can be assumed. If a 10 percent discount rate is appropriate for this stock, what is its value?

The Value of stock is $33.56

Explanation:

First we need to calculate the dividend for each year

Year Dividend

1 ( $1 x ( 1 + 15% )^1$1.15

2( $1 x ( 1 + 15% )^2 $1.3225

3( $1 x ( 1 + 15% )^3 $1.5209

4( $1.5209 x ( 1 + 6% ) $1.6122

Calculate  the present value of each year's dividend

Year Present value

1 ( $1.15 / ( 1 + 10% )^1  $1.0455

2$1.3225 / ( 1 + 10% )^2 $1.0930

3$1.5209 / ( 1 + 10% )^3 $1.1427

4$1.6122 / ( 10% - 6% ) / ( 1 + 10% )^3_$30.2817

Total $33.5629

Hence priec of the stock is $33.56