Question

Orwell building supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 42.00% 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?

Answer 1

Hello Sir/ Mam

YOUR REQUIRED ANSWER IS $54.73

Given that after 2 years:

Dividend Just Paid	$3.53
Growth rate	6.00%
Rate of Return	12%

Hence,

D Ke-9 3.5287 * (1 + 0.06) Po= 0.12 – 0.06 3.740422 Po= 0.06 Po = $62.34

Now,

Time	Cashflow	PVF	PV
0	$0.00	1.0000	$0.00
1	$2.49	0.8929	$2.22
2	$65.87	0.7972	$52.51
Price today			$54.73

I hope this solves your doubt.

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