Question

The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be constant at 20% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (r_s) is 11%, what is its current stock price?

Select the correct answer.

a. $45.45

b. $43.59

c. $44.83

d. $46.07

e. $44.21

Answer 1

Price of stock = PV of CFs from it.

Div calculation:

Year	Cash Flow / Div	Formula	Calculation
1	$                     1.50	D0 ( 1 + g)	1.25 ( 1 + 0.2 )
2	$                     1.80	D1 ( 1 + g)	1.5 * ( 1 + 0.2 )
3	$                     2.16	D2 ( 1 + g)	1.8 * ( 1 + 0.2 )
4	$                     2.29	D3 ( 1 + g)	2.16 * ( 1 + 0.06 )

Price after 3 Years:

Price of Stock is nothing but PV of CFs from it.
P3 = D4 / [ Ke - g ]
= $ 2.29 / [ 11 % - 6 % ]
= $ 2.29 / [ 5 % ]
= $ 45.79

P3 - Price after 3 Years
D4- Div after 4 Years
Ke - Required Ret
g - Growth Rate

Price Today:

Year	Particulars	Cash Flow	PVF @11 %	Disc CF
1	D1	$      1.50	0.9009	$              1.35
2	D2	$      1.80	0.8116	$              1.46
3	D3	$      2.16	0.7312	$              1.58
3	P3	$   45.79	0.7312	$           33.48
Price				$           37.87

Pls check the options, they may wrong.