Question

Question 12 10 points Save Answer Lee Company's last dividend (Do) was 50.80. The dividend growth rate is expected to be constant at 8.0% each year for 2 years after which dividends are expected to grow at a rate of 5.0% forever. The firm's required return (te) is 11.0%. What is the best estimate of the current stock price? 511.72 $10.28 512.17 510:37 311.09

Answer 1

g1 = growth rate = 8%

g2 = growth rate = 5%

r = required return = 11%

Last Dividend = D0 = $0.80

Dividend in Year 1 = D1 = D0 * (1+g1) = $0.80 * (1+8%) = $0.864

Dividend in Year 2 = D2 = D1 * (1+g1) = $0.864 * (1+8%) = $0.93312

Dividend in Year 3 = D3 = D2 * (1+g2) = $0.93312 * (1+5%) = $0.979776

Horizon value = D3 / (r - g2)

= $0.979776 / (11%-5%)

= $16.3296

Current Price of stock = [D1 / (1+r)^1] + [D2 / (1+r)^2] + [Horizon value / (1+r)^2]

= [$0.864 / (1+11%)^1] + [$0.93312 / (1+11%)^2] + [$16.3296 / (1+11%)^2]

= [$0.864 / 1.11] + [$0.93312 / 1.2321] + [$16.3296 / 1.2321]

= $0.778378378 + $0.757341125 + $ 13.2534697

= $14.7891892

Best estimate of current price of stock is $14.79