Ammermann Components recently paid a dividend of $1 per share. This dividend is expected to grow at a rate of 25 percent a year for the next five years, after which it is expected to grow at a rate of 7 percent a year. The required rate of return for this stock is 18 percent. What is the estimated price of the stock?
D1=(1*1.25)=1.25
D2=(1.25*1.25)=1.5625
D3=(1.5625*1.25)=1.953125
D4=(1.953125*1.25)=2.44140625
D5=(2.44140625*1.25)=3.05175781
Value after year 5=(D5*Growth rate)/(Required rate-Growth rate)
=(3.05175781*1.07)/(0.18-0.07)
=29.6852805
Hence price of stock=Future dividend and value*Present value of discounting factor(rate%,time period)
=1.25/1.18+1.5625/1.18^2+1.953125/1.18^3+2.44140625/1.18^4+3.05175781/1.18^5+29.6852805/1.18^5
=$18.94(Approx).
Ammermann Components recently paid a dividend of $1 per share. This dividend is expected to grow...
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