Question

Thirsty Cactus Corp. just paid a dividend of $1.50 per share. The dividends are expected to grow at 35 percent for the next 8 years and then level off to a 6 percent growth rate indefinitely.

   

Required :

If the required return is 13 percent, what is the price of the stock today?

rev: 09_18_2012

$3.58

$125.72

$123.26

$94.26

$120.79

Answer 1

C. $123.26

We can use the two-stage dividend growth model for this problem, which is:

P₀ = [D₀(1 + g₁)/(R – g₁)]{1 – [(1 + g₁)/(1 + R)]^T}+ [(1 + g₁)/(1 + R)]^T[D₀(1 + g₂)/(R – g₂)]

P₀ = [$1.50(1.35)/(0.13 – 0.35)][1 – (1.35/1.13)⁸] + [(1.35)/(1.13)]⁸[$1.50(1.06)/(0.13 – 0.06)]

P₀ = $123.26