The required rate of return is (r) = 0.05 + 1.4(0.12 − 0.05) = 0.148
The future dividends are predicted as the following:
Year
Dividend
0
1.50
1
1.50 × 1.2 = 1.80
2
1.80 × 1.18 =2.124
3
2.124 × 1.16 = 2.464
4
2.464 × 1.09 = 2.686
5
2.686 × 1.08 = 2.900
6
2.901 × 1.07 = 3.103
7
3.103 × 1.04 = 3.227
Now discount the dividend stream to get the value per share. Use the Gordon growth model to discount the constant growth after period 6. Value per share = (1.8 / 1.148) + (2.124 / 1.1482) + (2.464 / 1.1483) + (2.686 / 1.1484) + (2.900 / 1.1485) + (3.103 / 1.1486) + (3.227 / 1.1486(0.148 − 0.04)) = 22.22.
