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A stock is expected to grow at a rate of 22% for the next three years....

A stock is expected to grow at a rate of 22% for the next three years. A recent dividend paid was $1.35 per share. After three years, the stock is expected to grow at a constant rate of 12% per year. If the minimum acceptable rate of return is 14%, what is the current expected price? Show all work.

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Expert Solution

D1=(1.35*1.22)=1.647

D2=(1.647*1.22)=2.00934

D3=(2.00934*1.22)=2.4513948

Value after year 3=(D3*Growth rate)/(Required return-Growth rate)

=(2.4513948*1.12)/(0.14-0.12)

=137.278109

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

=1.647/1.14+2.00934/1.14^2+2.4513948/1.14^3+137.278109/1.14^3

=$97.30(Approx)

jeff jeffy answered 2 years ago
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