Question

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A company just paid a dividend of $1.30 per share. You expectthe dividend to grow...

A company just paid a dividend of $1.30 per share. You expect the dividend to grow 11% over the next year and 8% two years from now. After two years, you have estimated that the dividend will continue to grow indefinitely at the rate of 5% per year. If the required rate of return is 12% per year, what would be a fair price for this stock today? (Answer to the nearest penny.)

Expert Solution

Dividend just paid(D0) = $1.30

Growth rate of Dividend in next year = 11%

Expected Dividend one year from now(D1) = D0*(1+ Growth rate) = $1.30*(1+0.11)

D1 = $1.443

Growth rate of Dividend two years from now = 8%

Expected Dividend two year from now(D2) = D1*(1+ Growth rate) = $1.443*(1+0.08)

D2 = $1.55844

Therafter, Dividend will grow at a constant rate(g) = 5% per year forever

Required return(ke) = 12%

Calculating the Price of Stock:-

P0 = $1.288 + $1.242 + $18.636

P0 = $21.17

So, fair price for this stock today is $21.17

jeff jeffy answered 2 years ago

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