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Navel County Choppers, Inc., is experiencing rapid growth. The company expects dividends to grow at 20...

Navel County Choppers, Inc., is experiencing rapid growth. The company expects dividends to grow at 20 percent per year for the next 9 years before leveling off at 5 percent into perpetuity. The required return on the company’s stock is 13 percent. If the dividend per share just paid was $1.74, what is the stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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Answer #1

We can use the two-stage dividend growth model for this problem, which is:

P0 = [D0(1 + g1) / (R − g1)]{1 − [(1 + g1) / (1 + R)]t} + [(1 + g1) / (1 + R)]t[D0(1 + g2) / (R − g2)]

P0 = [$1.74(1.20) / (.13 − .20)][1 − (1.20 / 1.13)9] + [(1.20) / (1.13)]9[$1.74(1.05) / (.13 − .05)]

P0 = $60.63

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