A stock just paid annual dividends of $3.55 per share. The dividends are expected to grow at 20 per cent per year for 4...

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A stock just paid annual dividends of $3.55 per share. The dividends are expected to grow at 20 per cent per year for 4...

A stock just paid annual dividends of $3.55 per share. The dividends are expected to grow at 20 per cent per year for 4 years, and then remain constant in perpetuity. If the investors' required return for the stock is 11.8 percent, what should be the price of the stock today?

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Answer 1

Answer #1

D₁ = 3.55(1.20) = $4.26

D₂ = 3.55(1.20)² = $5.11

D₃ = 3.55(1.20)³ = $6.13

D₄ = 3.55(1.20)⁴ = $7.36

Stock Price = 4.26/(1.118) + 5.11/(1.118)² + 6.13/(1.118)³ + 7.36/(1.118)⁴ + 7.36/(0.118)(1.118)⁴

Stock Price = $56.92

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Answer 2

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