Answer: $76.46
Explanation:
The price at the end of year 5 is the sum of the present values of the dividends from year 6 to 10 and the present value of the terminal in year 10.
Year Dividends Discount factor Present value
6 10 ( 1 + 20%) 8.33
7 10 * 1.1 = 11 (1 + 20%)² 7.64
8 10 * 1.1² = 12.1 (1 + 20%)³ 7.00
9 10 * 1.1³ = 13.31 (1 + 20%)⁴ 6.42
10 10 * 1.1⁴ = 14.641 (1 + 20%)⁵ 5.88
Total 35.27
Terminal value at year 10 = Next dividend / (Discount rate - growth)
= (14.641 * 1.05) / (20% - 5%)
= $102.487
Present value = 102.487/ (1 + 20%)⁵ = $41.187
Price of stock = 41.187 + 35.27
= $76.46
