# 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%.

1. Lyra

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

2. Lyra

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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