# AXP just paid a dividend of \$0

AXP just paid a dividend of \$0.80 per share and analystsforecasted five-year growth rates of 10.54 percent per year for AXPand 13.21 percent per year for the industry average. Assume thegrowth rate for the industry average will remain constant. Then,assuming AXP’s growth rate will revert to the industry averageafter five years, what share price would we place on AXP today, ifwe use a discount rate of 15 percent per year?

The value of the stock is computed as shownbelow:

= Dividend in year 1 / (1 + required rate ofreturn)1 +Dividend in year 2 / (1 + required rate ofreturn)2 + Dividend inyear 3 / (1 + required rate ofreturn)3 + Dividend inyear 4 / (1 + required rate ofreturn)4 + Dividend inyear 5 / (1 + required rate ofreturn)5 + 1 / (1 +required rate of return)5[ ( Dividend in year 5 (1 + growth rate) / ( required rateof return – growth rate) ]

= (\$ 0.80 x 1.1054) / 1.15 + (\$ 0.80 x 1.10542) /1.152 + (\$ 0.80 x 1.10543) / 1.153+ (\$ 0.80 x 1.10544) / 1.154 + (\$ 0.80 x1.10545) / 1.155 + 1 / 1.155 x [(\$ 0.80 x 1.10545 x 1.1321) / (0.15 – 0.1321) ]

= \$ 0.88432 / 1.15 + \$ 0.977527328 / 1.152 + \$1.080558708 / 1.153 + \$ 1.194449596 / 1.154 +\$ 1.320344584 / 1.155 + \$ 83.50626275 /1.155

= \$ 0.88432 / 1.15 + \$ 0.977527328 / 1.152 + \$1.080558708 / 1.153 + \$ 1.194449596 / 1.154 +\$ 84.82660733 / 1.155

= \$ 45.08 Approximately

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