Question

A stock is expected to pay a dividend of $2.74 per share next year, $3.2 two years from now, and $3.38 three years from now. After that, the dividend is expected to grow at a constant rate of 5% per year indefinitely. The required return on the stock is 9%. The estimated price per share is $___________.

Rounding and Formatting: Do not enter a dollar sign in your response. Round your answer to 2 decimal places. Example: If your answer is $12.34567, you should enter 12.35 as your response.

Answer 1

Year 1 dividend = 2.74

Year 2 dividend = 3.2

Year 3 dividend = 3.38

Year 4 dividend = 3.38 (1 + 5%) = 3.549

Value in year 3 = Year 4 dividend / required rate - growth rate

Value in year 3 = 3.549 / 0.09 - 0.05

Value in year 3 = 3.549 / 0.04

Value in year 3 = 88.725

price per share = Present value of cash flows

Present value = Future value / (1 + rate)^time

Present value = 2.74 / (1 + 0.09)^1 + 3.2 / (1 + 0.09)^2 + 3.38 / (1 + 0.09)^3 + 88.725 / (1 + 0.09)^3

Present value = 2.5138 + 2.69338 + 2.60998 + 68.51198

Present value = $76.33