The Felix Corp. will pay an annual dividend of $1.00 next year. The dividend will increase by 12 percent a year for the following two years before growing at 4 percent indefinitely thereafter. If the required rate of return is 10 percent, what is the stock’s current value? Solution PVF@10% Present value D1 $ 1.00 0.909 $ 0.91 D2 $ 1.12 0.826 $ 0.93 D3 $ 1.25 0.751 $ 0.94 D4 $ 1.30 $ - P3 $ 21.74 0.751 $ 16.34 1.30/(10%-4%) Stock current value $ 19.11.

1. The Felix Corp. will pay an annual dividend of $1.00 next year. The dividend will increase by 12
percent a year for the following two years before growing at 4 percent indefinitely thereafter. If
the required rate of return is 10 percent, what is the stock’s current value?
Solution
PVF@10% Present value D1 $ 1.00 0.909 $ 0.91 D2
$ 1.12 0.826 $ 0.93 D3 $ 1.25 0.751 $ 0.94
D4 $ 1.30 $ - P3 $ 21.74 0.751 $ 16.34
1.30/(10%-4%) Stock current value $ 19.11