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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%.

  • Accounting -

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

  • Accounting -

    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

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