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An analyst has been following American Dream stock. He projects the following dividends for the next...

An analyst has been following American Dream stock. He projects the following dividends for the next three years:

YEAR 1 2 3
Dividend $1.77 $2.18 $2.94

The analyst notes that American Dream stock has a required return of 10.26%. The analyst projects that dividends will grow at a constant rate of 2.00% per year after year 3.

What is the current price of the stock if his assumptions are correct?

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Answer #1

P3 = D4 / (k-g)

= 2.94(1.02) / (0.1026 - 0.02)

= 2.9988 / 0.0826

P3 = $36.305

Current Price (P0)

P0 = D1/(1+k) + D2/(1+k)2 + D3/(1+k)3 + P3/(1+k)3

= 1.77/(1.1026) + 2.18/(1.1026)2 + 2.94/(1.1026)3 + 36.305/(1.1026)3

P0 = $32.6757 or $32.68

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