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Math Help - Nonconstant Growth (FINC 3105)

  1. #1
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    Nonconstant Growth (FINC 3105)

    I need a little bit of help with this problem.

    Stag Corp. will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four years. Thereafter, the company expects its growth to be at a constant rate of 7 percent. If the required rate of return is 15 percent, what is the current price of the stock?

    For the most part I understand the nonconstant growth formula and how to calculate when dividends are constant but I am completely confused with this problem. Thank you.
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  2. #2
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    Quote Originally Posted by jlhicks View Post
    I need a little bit of help with this problem.

    Stag Corp. will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four years. Thereafter, the company expects its growth to be at a constant rate of 7 percent. If the required rate of return is 15 percent, what is the current price of the stock?

    For the most part I understand the nonconstant growth formula and how to calculate when dividends are constant but I am completely confused with this problem. Thank you.
    You will rarely be confused if you learn "Basic Principles".

    Interest ==> i = 0.15
    Discount ==> v = 1/(1+i) = 1/1.15 = 0.8695652173913
    Inflation ==> r = 0.07
    Growth ==> g = 1+r = 1.07

    That's it. Now build it.

    4.75v + 5.25v^{2} + 5.75v^{3} + 7.00v^{4} + 7gv^{5}(1 + (gv)^{1} + (gv)^{2} + ...)

    All you're left with is adding it up!
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  3. #3
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    After trying this formula and receiving an answer that was not listed I spoke with my professor about it and found out that the actual formula that I should have been using was relatively simple. The formula was: 4.75(1.15)+5.25(1.15)^2+5.75(1.15)^3+7(1.15)^4+(7( 1.07)/((.15-.07) ))/(1.15)^4 =69.41
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