Question

The Ramírez Company's ast dividend was $1.75 lts dividend growth rate is expected to be constant a 25% or 2 years after which required return is 12%, what is the best estimate of the current stock price? idend5 are expected to row at a rate of % t rever, O $41.58 O $42.64 $43.71 O $44.80 O $45.92

Answer 1

Last Dividend, D0 = $1.75
Required Return, rs = 12.00%

Growth rate for next 2 years is 25% and a constant growth rate (g) of 6% thereafter.

D1 = $1.7500 * 1.25 = $2.1875
D2 = $2.1875 * 1.25 = $2.7344
D3 = $2.7344 * 1.06 = $2.8985

P2 = D3 / (rs - g)
P2 = $2.8985 / (0.12 - 0.06)
P2 = $48.3083

P0 = $2.1875/1.12 + $2.7344/1.12^2 + $48.3083/1.12^2
P0 = $42.64

So, current stock price is $42.64