a stock just paid a dividend of 3.00 . based on a reliable forecast, dividends will...
a stock just paid a dividend of 3.00 . based on a reliable forecast, dividends will grow at 25% for the next two years and 5% forever after that. assuming a discount rate of 12% ,stock is worth?
the answer is 63.14 but i dont know how to get to it so please help
Homework Answers
value of stock = Present value of dividends + Horizontal value
Horizontal value = dividend next year/(Required return - growth rate)
=>
Horizontal value = 3 * 1.25^2 * 1.05/(0.12-0.05)
= 70.3125
Value of stock = 3*1.25/1.12 + 3*1.25^2/1.12^2 + 70.3125/1.12^2
= 63.14
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