2) Suppose that a stock is expected to pay a dividend of $2.50 next year, a...

Question

Question

Answer 1

Answer #1

D1 = $2.50
D2 = $2.75
D3 = $3.00

Growth Rate, g = 4%
Required Return, rs = 8%

D4 = D3 * (1 + g)
D4 = $3.00 * 1.04
D4 = $3.12

P3 = D4 / (rs - g)
P3 = $3.12 / (0.08 - 0.04)
P3 = $78.00

P0 = $2.50/1.08 + $2.75/1.08^2 + $3.00/1.08^3 + $78.00/1.08^3
P0 = $68.97

Therefore, current price of the stock is $68.97

Answer 2

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