A company pays a dividend of $2 today. Its dividend expects to grow at 5% for...
A company pays a dividend of $2 today. Its dividend expects to grow at 5% for the first two years and 6% forever after that and the required rate of return is 9%. What is its stock price today?
STEP BY STEP PLEASE
Homework Answers
D1=(2*1.05)=2.1
D2=(2.1*1.05)=2.205
Value after year 2=(D2*Growth rate)/(Required return-Growth rate)
=(2.205*1.06)/(0.09-0.06)
=77.91
Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)
=2.1/1.09+2.205/1.09^2+77.91/1.09^2
=$69.36(Approx)
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