Math Help - Nonconstant Growth (FINC 3105)

1. 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.

2. Originally Posted by jlhicks
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!

3. 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