The Bellingham Bay Company is planning on increasing its annual dividend by 20 percent a year for the next 2 years and then decreasing the growth rate to 5 percent per year. The company just paid its annual dividend in the amount of $1.00 per share. What is the current value of one share of this stock if the required rate of return is 8 percent?
Group of answer choices
$51.84
$50.40
$45.56
$43.20
D1=(1*1.2)=1.2
D2=(1.2*1.2)=1.44
Value after year 2=(D2*Growth rate)/(Required return-Growth rate)
=(1.44*1.05)/(0.08-0.05)
=50.4
Hence current value=Future dividend and value*Present value of discounting factor(rate%,time period)
=1.2/1.08+1.44/1.08^2+50.4/1.08^2
=$45.56(Approx)
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