The Homie Corporation has the following expected dividends: $1.10 in one year, $1.25 in two years,...
The Homie Corporation has the following expected dividends: $1.10 in one year, $1.25 in two years, and $1.35 in three years. After that dividends are expected to grow 4% per year forever. If the equity cost of capital is 10%, what is the current price of the stock?
Homework Answers
Value after year 3=(D3*growth rate)/(required return-growth rate )
=(1.35*1.04)/(0.1-0.04)
=$23.4
Hence current price=future dividend*present value of discounting factor (10%, time period)
=1.1/1.1+1.25/1.1^2+1.35/1.1^3+23.4/1.1^3
Which is equal to
=$20.63(approx).
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