Accounting
posted by Lyra .
What is the value of a stock that grows at a supernormal rate of 18% for the first four years, and then slows down to a constant growth rate of 10%? An annual dividend of $2.00/share was just paid, and the rate of return on common stock is 13%.

Would anyone be able to help me get started with the formula?

I think this is the solution. Please let me know what you think.
Supernormal Growth:
D0 = $2.00
D1 = 2.00(1+0.18) = $2.36
D2 = 2.36(1+0.18) = $2.78
D3 = 2.78(1+0.18) = $3.28
D4 = 3.28(1+0.18) = $3.87
Constant Growth:
D5 = [3.87(1+0.10)] / [0.13 – 0.10] = 4.257 / 0.03 = $141.90
Respond to this Question
Similar Questions

Finance questions
1) growth rates The stock price of the company is $76 investors require a 14% rate of return on similar stocks If the company plans to pay a dividend of $5.00 next year the expected growth rate of the company's stock price is ______ … 
Finance. PLEASE HELP ME
1) growth rates The stock price of the company is $76 investors require a 14% rate of return on similar stocks If the company plans to pay a dividend of $5.00 next year the expected growth rate of the company's stock price is ______ … 
value of common stock
• Emerson Electric common stock that is selling for $80 with a par value of $5. This stock recently paid a $2.10 dividend, and the firm’s earnings per share have increased from $2.40 to $4.48 in the past 5 years. An equivalent … 
Finance
Caledonia last paid a dividend of $1 per share 2010. In 2007, the Caledonia paid a dividend of $0.84. This dividend growth rate is expected to be constant for the foreseeable future if the merger is not completed. If the merger is … 
Finance
Simtek currently pays a $2.50 dividend (D0) per share. Next year’s dividend is expected to be $3 per share. Aft er next year, dividends are expected to increase at a 9 percent annual rate for three years and a 6 percent annual rate … 
adult education
California Clinics, an investorowned chain of ambulatory care clinics, just paid a dividend of $2 per share. The firm’s dividend is expected to grow at a constant rate of 5% per year, and investors require a 15 % rate of return … 
Finance
Universal Laser, Inc., just paid a dividend of $3.30 on its stock. The growth rate in dividends is expected to be a constant 6 percent per year, indefinitely. Investors require a return of 15 percent on the stock for the first three … 
Math
What is the value of a stock that grows at a supernormal rate of 18% for the first four years, and then slows down to a constant growth rate of 10%? 
Accounting
How can I find the supernormal growth rate and constant growth rate of a stock? 
Accounting
What is the value of a company stock if it grows at a supernormal rate of 18% for the first four years, and then slows down to a constant growth rate of 10%. The company just paid annual dividend of $2.00/share, and the rate of return …