AbacusCorporationwillpaydividendsof$2.25,$2.95,and$3.15inthenextthreeyears.Afterthree years, the dividends are expected to grow at a constant rate of 4 percent per...

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AbacusCorporationwillpaydividendsof$2.25,$2.95,and$3.15inthenextthreeyears.Afterthree years, the dividends are expected to grow at a constant rate of 4 percent per...

AbacusCorporationwillpaydividendsof$2.25,$2.95,and$3.15inthenextthreeyears.Afterthree years, the dividends are expected to grow at a constant rate of 4 percent per year. If the required rate of return is 14.5 percent, what is the current value of the Abacus common stock?

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Answer 1

Answer #1

Value after year 3=(D3*Growth Rate)/(Required Return-Growth Rate)

=(3.15*1.04)/(0.145-0.04)

=$31.2

Hence current value=Future dividends*Present value of discounting factor(rate%,time period)

=2.25/1.145+2.95/1.145^2+3.15/1.145^3+31.2/1.145^3

=$27.10(Approx).

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Answer 2

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