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Q: Winters Hi-Hook Inc., a golf club manufacturer, is currently paying dividends of \$.50 per share. These dividends are expected to grow at a 20 percent rate for the next two years and at a three
percent rate thereafter (forever!). What is the value of the stock if the appropriate discount rate is 14 percent?
A: \$6.26 is the value of the stock if the appropriate discount rate is 14 percent. Solution: D1 = D0 (1 + g) = \$0.50 (1.20) = \$0.60 D2 = D1 (1 + g) = \$0.60 (1.20) = \$0.72 D3 = D2 (1 + g) = \$0.72 (1.03) = \$0.74 P2 = D3/(r - g) = \$0.74/(0.14 - 0.03) = [ \$0.74/0.11 = \$6.73 P0 = [D1/(1 + r)] + [D2/(1 + r)2] + [P2/(1 + r)2] = [\$0.60/(1.14)] + [\$0.72/(1.14)2] + [\$6.73/(1.14)2] = \$0.526 + \$0.554 +
\$5.179 = \$6.26 ]
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