
CHAPTER 8 B-145
The price of the stock today is simply the PV of the stock price in the future. We simply discount the future
stock price at the required return. The price of the stock today will be:
P
12. The price of a stock is the PV of the future dividends. This stock is paying four dividends, so the price of
the stock is the PV of these dividends using the required return. The price of the stock is:
P
13. With supernormal dividends, we find the price of the stock when the dividends level off at a constant
growth rate, and then find the PV of the future stock price, plus the PV of all dividends during the
supernormal growth period. The stock begins constant growth in Year 4, so we can find the price of the
stock in Year 4, at the beginning of the constant dividend growth, as:
P
The price of the stock today is the PV of the first four dividends, plus the PV of the Year 3 stock price. So,
the price of the stock today will be:
P
14. With supernormal dividends, we find the price of the stock when the dividends level off at a constant
growth rate, and then find the PV of the futures stock price, plus the PV of all dividends during the
supernormal growth period. The stock begins constant growth in Year 4, so we can find the price of the
stock in Year 3, one year before the constant dividend growth begins as:
The price of the stock today is the PV of the first three dividends, plus the PV of the Year 3 stock price.
The price of the stock today will be:
P
We could also use the two-stage dividend growth model for this problem, which is:
P
15. Here we need to find the dividend next year for a stock experiencing supernormal growth. We know the
stock price, the dividend growth rates, and the required return, but not the dividend. First, we need to
realize that the dividend in Year 3 is the current dividend times the FVIF. The dividend in Year 3 will be:
D