Question

Robotic Atlanta Inc. just paid a dividend of $4.00 per share (that is, D0 = 4.00). The dividends of Robotic Atlanta are expected to grow at a rate of 20 percent next year (that is, g1 = .20) and at a rate of 10 percent the following year (that is, g2 = .10). Thereafter (i.e., from year 3 to infinity) the growth rate in dividends is expected to be 5 percent per year. Assuming the required rate of return on Robotic Atlanta stock is 20 percent, compute the current price of the stock. (Round your answer to 2 decimal places and record your answer without dollar sign or commas)

Answer 1

P0 = [{D0 * (1 + g1)} / (1 + r)] + [{D0 * (1 + g1) * (1 + g2)} / (1 + r)²] + [{D0 * (1 + g1) * (1 + g2) * (1 + gC)} / {(r - gC) * (1 + r)²}]

= [{$4 * (1 + 0.20)} / (1 + 0.20)] + [{$4 * (1 + 0.20) * (1 + 0.10)} / (1 + 0.20)²] + [{$4 * (1 + 0.20) * (1 + 0.10) * (1 + 0.05)} / {(0.20 - 0.05) * (1 + 0.20)²}]

= $4 + $3.67 + $25.67 = $33.33