Universal Laser just paid a dividend of $3.40 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a return of 13 percent for the first three years, a return of 11 percent for the next three years, and then a return of 9 percent thereafter. What is the current share price for the stock?

Total Value of stock today = $76.76

Explanation:

B      G         Dividend Cf       P         NF       Discounting factor    NF*Df

1    5.00%     3.570                           3.57000    0.884956             3.15929

2    5.00%    3.7485                         3.74850      0.783147              2.93563

3    5.00%    3.935925                   3.93593     0.693050            2.72779

4    5.00%    4.13272125                  4.13272       0.624370             2.58035

5    5.00%    4.33935731                 4.33936       0.562495            2.44087

6    5.00%   4.55632518    119.60  124.15986    0.506752            62.91830

Total Value of stock today =                                                        $76.76

Workings

Price of stock* at end of year 6 = Dividend in year 6 x (1+Growth rate) / (Required rate-Growth rate)

Price of stock* at end of year 6 = 4.55632518 x (1+5%) / (9%-5%)

Price of stock* at end of year 6 = 119.603536

b = Year , g = Growth, dcf = Dividend Cash flow, p = Price of stock* , Nf = Net cash inflow , Discounting factor = Df, Present value = Nf*Df

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