QWE Corporation just paid a dividend of $2 a share. The dividends are expected to grow...

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QWE Corporation just paid a dividend of $2 a share. The dividends are expected to grow...

QWE Corporation just paid a dividend of $2 a share. The dividends are expected to grow at 10% a year for the next 3 years, and the 5% per year thereafter. The required rate of return on QWE stock is 12%. What is the current price of QWE?

Question 8 options:

	Not enough information.
	$22.68
	$35.58
	$28.47
	$34.26

business finance

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Answer 1

Answer #1

D0 = $2

From then, the dividend grows by 10% for next 3 years

D1 = $2 * 1.10 = $2.20

D2 = $2.20 * 1.10 = $2.42

D3 = $2.42 * 1.10 = $2.662

Terminal value = $2.662 * 1.05 / (0.12 -0.05) = $39.93

Price = Present value of cash flows

Price = [$2.2/(1.12)¹] + [$2.42/(1.12)²] + [$2.662/(1.12)³] + [$39.93/(1.12)³]

Price = $34.26

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Answer 2

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