Thirsty Cactus Corp. just paid a dividend of $1.55 per share. The dividends are expected to grow at 25 percent for the next 8 years and then level off to a 8 percent growth rate indefinitely. Required : If the required return is 14 percent, what is the price of the stock today

The two stage growth model of DDM will be used to calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D0 * (1+g1) / (1+r) + D0 * (1+g1)^2 / (1+r)^2 + ... + D0 * (1+g1)^n / (1+r)^n + [(D0 * (1+g1)^n * (1+g2) / (r - g2)) / (1+r)^n]

Where,

g1 is the initial growth rate

g2 is the constant growth rate

D0 is the dividend paid today or most recently

r is the required rate of return

P0 = 1.55 * (1+0.25) / (1+0.14) + 1.55 * (1+0.25)^2 / (1+0.14)^2 +

1.55 * (1+0.25)^3 / (1+0.14)^3 + 1.55 * (1+0.25)^4 / (1+0.14)^4 +

1.55 * (1+0.25)^5 / (1+0.14)^5 + 1.55 * (1+0.25)^6 / (1+0.14)^6 +

1.55 * (1+0.25)^7 / (1+0.14)^7 + 1.55 * (1+0.25)^8 / (1+0.14)^8 +

[(1.55 * (1+0.25)^8 * (1+0.08) / (0.14 - 0.08)) / (1+0.14)^8]

P0 = $77.48686986 rounded off to $77.49

P0 = $174.3396226 rounded off to $174.34