Question

A firm is expected to pay dividends by 20% in year 1, 15% for the next three consecutive years, and then the dividends will increase by 5% forever. calculate the value of the stock today. the most recently paid dividend was $2 and the required rate of return is 12%.

a) 47.38

b) 74.39

c) 43.70

d) 34.69

e) 28.69

Answer 1

Recent paid dividends(D0) = $2

Expected dividend growth rate in year 1(g) = 20%

Expected dividend growth rate in next 3 three consecutive years after year 1 (g1) = 15%

Expected growth rate thereafter(g2) = 5% forever

Required rate of Return(Ke) = 12%

Calculating the Current value of Stock:-

P0 = 2.1429 + 2.2003 + 2.2592 + 2.3197 + 34.7956

P0 = $43.72

So, the value of the stock today is $43.70(Difference due to decimal rounding off).

Option C