Question

A7X Corp.just paid a dividend of $1.60 per share. The dividends are expected to grow at 35 percent for the next 9 years and then level off to a growth rate of 5 percent indefinitely If the required return is 14 percent, what is the price of the stock today?

Please write out the steps, thanks!

Answer 1

Price of the stock today=Present value of dividends=D0*((1+g)/(1+r))^1+....D0*((1+g)/(1+r))^n+D0*((1+g)/(1+r))^n*(1+g')/(r-g')=1.60*(1.35/1.14)+1.60*(1.35/1.14)^2+1.60*(1.35/1.14)^3+1.60*(1.35/1.14)^4+1.60*(1.35/1.14)^5+1.60*(1.35/1.14)^6+1.60*(1.35/1.14)^7+1.60*(1.35/1.14)^8+1.60*(1.35/1.14)^9+1.60*(1.35/1.14)^9*1.05/(14%-5%)
=122.31