Question

please answer both and show work!

Robotic Atlanta Inc. just paid a dividend of $4.00 per share (that is, DO 4.00). The dividends of Robotic Atlanta are expected to grow at a rate of 20 percent next year (that is, g1 .20) and at a rate of 10 percent the following year (that is, g2 = .10). Thereafter (i.., from year 3 to infinity) the growth rate in dividends is expected to be 5 percent per year. Assuming the required rate of return on Robotic Atlanta stock is 17 percent, compute the current price of the stock. (Round your answer to 2 decimal places and record your answer without dollar sign or commas).

Answer 1

Given Part 1) Growth Rate (G Symbol Rate 20% 1st Year G1 2nd Year 10% G2 5% Thereafter Gn DO (Current Dividend) $ 4 17.00% required rate of return [R] Solution : Part 1) Current price of stock As we know, that current price of stock is present vaule of future cash flow D1 D2 P Current Price (1+R)A2 (1+R)A2 1+R Where Dividend at end of 1st year D1 DO(1+G1) D2 D1(1+G2) Dividend at end of 2nd year D2(1+Gn) P (Price of Stock) (R -Gn) Hence Using above formula 46.20 4.80 5.28 Current Price ($) 1.170 1.369 1.369 4.10 3.86 33.75 41.71 Hence, current price of stock must be 41.71 Given Part 2 Dividend (Do) 0.77 Growth (g) discount rate (r) 4.40% 14.70% Solution : Part 2) price of stock Calculate price of Stock Do(1+g) (r-g) Price of Stock 0.80388 10% 7.80 Hence, price of stock is 7.80