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Assume a stock currently pays no dividends today, but expected to begin paying dividends $8 per...

Assume a stock currently pays no dividends today, but expected to begin paying dividends $8 per share in 3 years. The dividends are expected to have a constant growth rate of 7% at that time and firm has a cost of equity of 11.6%. Using the dividend discount model, what do you estimate the share price should be?

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Expert Solution

Value after year 3=(D3*Growth rate)/(Cost of equity-Growth rate)

=(8*1.07)/(0.116-0.07)

=186.086957

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

=8/1.116^3+186.086957/1.116^3

=$139.64(Approx)

jeff jeffy answered 2 years ago
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