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QUESTION 14 Parsons Construction just paid a $2 dividend (DO). The dividend is expected to grow by 5% each year for the next
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Answer #1

Growth rate (g)=   5%
Required rate of return(ke) =    10%
D0=   2
  
Dividned for year 1(D1) = D0*(1+g)  
2*(1+5%)=   2.1
  
D2= 2.1*(1+5%)=   2.205
  
D3= 2.205*(1+5%)=   2.31525
  
Current market price today is present value of stock that is equal to present value of dividend received upto 3 Years   
D1/(1+ke)^1 + D2/(1+ke)^2 + D3/(1+ke)^3  
(2.1/(1+10%)^1) +(2.205/(1+10%)^2) + (2.31525/(1+10%)^3)  
  
5.470886551  
  
So stock should sell for today is   $5.47
  

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