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1 Points Question 15 of 20 A fast growing company paid a dividend this year of $1, which is expected to grow at 20 % for two
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Answer #1

Step-1, Dividend for the next 2 years

Dividend in Year 0 (D0) = $1.00 per share

Dividend in Year 1 (D1) = $1.22 per share [$1.00 x 120%]

Dividend in Year 2 (D2) = $1.44 per share [$1.22 x 120%]

Step-2, The Value of the stock at the end of second year (P2)

Dividend Growth Rate after 2nd year (g) = 8.00% per year

Required Rate of Return (Ke) = 12.00%

Therefore, the Value of the stock at the end of second year (P2) = D2(1 + g) / (Ke – g)

= $1.44(1 + 0.08) / (0.12 – 0.08)

= $1.5552 / 0.04

= $38.88 per share

“Hence, the Value of the stock at the end of second year (P2) will be $38.88”

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