The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year. The company just paid its annual dividend in the amount of $1.00 per share. What is the current value of one share if the required rate of return is 9.25%?

[tex]\left[\begin{array}{ccc}Year&Dividends&Present \: Value\\0&1&-\\1&1.2&1.0984\\2&1.44&1.2065\\3&1.728&1.3252\\4&2.0736&1.4556\\5&51.2301&32.9168\\Intrinsic&Value&38.0025\\\end{array}\right][/tex]

Fist, we calcualte the increase of the dividends, by multipling by (1+growth) 1.20 until year 4.

At year 5 we multiply by 1.05

Because from here the company will have a fixed growth rate, we can apply the dividend growth model

[tex]\frac{divends}{return-growth} = Intrinsic \: Value[/tex]

1.52838/ (0.0925-0.05) = 51.2301

Next we have to bring all these dividends, which are placed in futures date, to present value:

[tex]\frac{Principal}{(1 + rate)^{time} } = PV[/tex]

for example

[tex]\frac{1.728}{(1 + 0.0925)^{3} } = PV[/tex]

PV = 1.3252

Lastly, we add all the PV to get the intrinsic value of the share today.