Question

Return to questionItem 10Item 10 10 points A7X Corp. just paid a dividend of $1.35 per share. The dividends are expected to grow at 35 percent for the next 7 years and then level off to a growth rate of 8 percent indefinitely. If the required return is 14 percent, what is the price of the stock today?

Answer 1

We can use the two-stage dividend growth model for this problem, which is:

P0 = [D0(1 + g1)/(R – g1)]{1 – [(1 + g1)/(1 + R)]^T} + [(1 + g1)/(1 + R)]^T[D0(1 + g2)/(R – g2)]

P0 = [$1.35(1.35)/(.14 – .35)][1 – (1.35/1.14)⁷] + [(1.35)/(1.14)]⁷[$1.35(1.08)/(.14 – .08)]

P0 = $99.03