Suppose the Pale Hose Corp. is expected to pay a dividend next year of $1.75 per share. Both sales and profits for Pale Hose are expected to grow at a rate of 15% for the following two years and then at 2% per year thereafter indefinitely. Dividend growth is expected to match sales growth. If the required return is 14%, what is the value of a share of Pale Hose?

Question

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The value of the stock is calculated using the dividend discount model with varying growth rates. Calculate the dividends for the first three years, then use the Gordon Growth Model for the terminal value from year 3 onwards. Discount all cash flows to present value using the required return of 14%.