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a company is going to pay a dividend of $1.00 each of the next 2 years before raising their dividend by 3% annually in p...

a company is going to pay a dividend of $1.00 each of the next 2 years before raising their dividend by 3% annually in perpetuity. What would price now be if the dividend discount rate was 10.1%

A. $12.55

B. $15.08

C. $14.08

D. $4.20

E. $13.70

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Answer #1

value of stock = Present value of dividends + Horizontal value

Horizontal value = dividend next year/(Required return - growth rate)

=>

horizontal value = 1 * 1.03/(0.101 - 0.03)

= 14.5070422535

value of stock = 1/1.101 + 1/1.101^2 + 14.5070422535/1.101^2

= 13.7

hence choose E)

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