Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2.00, a dividend...
Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2.00, a dividend in year 2 of $3.00, and a dividend in year 3 of $4.00. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today.
A) $63.80
B) $65.13
C) $67.95
D) $85.60
My professor has the answer as C: 67.95, but I am getting D: 85.6
Homework Answers
value of stock = Present value of dividends + Horizontal value
Horizontal value = dividend next year/(Required return - growth rate)
=>
horizontal value = 4 * 1.07/(0.12-0.07)
= 85.6
value of stock = 2/1.12 + 3/1.12^2 + 4/1.12^3 + 85.6/1.12^3
= 67.95
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