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Mike works for a prominent technology company. His company just paid a $1.50 dividend per share....

Mike works for a prominent technology company. His company just paid a $1.50 dividend per share. The required return for his company’s stock is 12%.

(Input all answers as positive values, no commas, with no symbols ex. no $ or %. Input all % answers as whole numbers without symbols ex. 10.03 for .1003. Input all final answers two decimal places out.)

Consider the following information. Suppose Mike’s company is expected to increase dividends by 12% in one year, and by 8% in two years. After that, his company’s dividends will increase at a rate of 6% indefinitely. If the last dividend was $1.50 and the required rate of return in 12%, what is the current price of the stock.

Solutions

Expert Solution

D0 = 1.50

D1 = 1.50( 1+ 0.12) = 1.68

D2 = 1.68( 1+ 0.08) = 1.8144

Value of Stock =

where r = 0.12

G = 0.06

=

= $28.50

jeff jeffy answered 2 years ago
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