Company ABC's earnings and dividends will grow at 0.

5% monthly during the

next five years. Its growth will stop after year 5. In year 6 and afterward, it will
pay out all earnings as dividends. Assume next years EPS is $10 and the
dividend is $5 and the market capitalization rate is 9 %.

What is ABCs stock price?

If next years dividend would be $5, and the growth rate is expected to be 6% per
year (0.5% x 12), then year 2 dividends = ($5 x 1.06) = $5.3
Year 3 = ($5.3 x 1.06) $5.618
Year 4 = ($5.618 x 1.06) $5.95508
Year 5 = ($5.9558 x 1.06) $6.31238

In year 6, it will pay out all its earnings as dividends, so we need to calculate the
EPS for year 6

Year 1 EPS = $10

Year 2 EPS = ($10 x 1.06) $10.6
Year 3 EPS = ($10.6 x 1.06) $11.236
Year 4 EPS = ($11.236 x 1.06) $11.9102
Year 5 EPS = ($11.9102 x 1.06) $12.6248
Year 6 EPS = ($12.6248 x 1.06) $13.3823

Since the EPS will remain constant from year 6 onwards, we can consider year 6
EPS a perpetuity
The PV of the perpetuity (at year 6) would be:

D $13.3823
= = $148.692
r 0.09

The current price per share is the Present value of all future cash flows,
therefore:

$5 $5.3 $5.618 $5.95508 $6.31238 $148.692

P0 = + + + + +
(1.09) (1.09) (1.09)3
1 2
(1.09) 4 (1.09)5 (1.09)6

= $110.368