The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 18 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $2.50 per share. What is the current value of one share of this stock if the required rate of return is 8.00 percent? a. $73.39 b. $88.43 c. $99.85 d. $102.35 e. $85.93

e. $85.93

Explanation:

discount rate0.08

#Cashflow*      Discounted

0  0

1      2.95                    2.73

2      3.481                        2.98

3      4.10758                3.26

4      4.8469444        3.56

4  99.84705464      73.39

                              85.92

As we have paid a dividend of 2.50

we calcaulte the subsequent dividends by mutiplying by the grow rate

2.50 x (1 + 18%) = 2.95

2.95 x (1 + 18%) = 3.481

Then, once the grow is stable we solve using the gordon formula:

dividnds / (return - growth)

(4.8469444 x 1.03) / (0.08-0.03) = 99.84705464

Last step we solve for the present value of each one giving a total of 85.92

y=mx+b is the right slope of velocity carry the 4 over