Orwell building supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 37.00% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?
Select the correct answer.
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Please find below the solution ... Please do provide rating...
Correct answer is option b. $51.02
| Current price is present value of future cash flow/Dividend | ||||||
| Year - 1 dividend = 1.75*137% | 2.40 | |||||
| Year -2 dividend = 2.4*137% | 3.28 | |||||
| At the end of year-2 terminal value. | ||||||
| Terminal cash flow = 3rd year dividend /(required rate - Growth rate) | ||||||
| =3.28*1.06/(12%-6%) | ||||||
| 58.03 | ||||||
| Year | Dividend | Horizon value | Total cash flow | PVIF @ 12% | present value | |
| 1 | 2.40 | 2.40 | 0.8929 | 2.14 | ||
| 2 | 3.28 | 58.03 | 61.31 | 0.7972 | 48.88 | |
| 51.02 | ||||||
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