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Hope corporation paid a dividend of $2.00 (D0) last year. The growth rate is expected to...

Hope corporation paid a dividend of $2.00 (D0) last year. The growth rate is expected to be 20 percent and 10 percent during the next two years, and then the growth rate is expected to be a constant 5 percent thereafter. The required rate of return on equity (rS) is 10 percent. What is the current stock price (P0)?

Solutions

Expert Solution

D1=(2*1.2)=2.4

D2=(2.4*1.1)=2.64

Value after year 2=(D2*Growth rate)/(Required return-Growth rate)

=(2.64*1.05)/(0.1-0.05)

=55.44

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

=2.4/1.1+2.64/1.1^2+55.44/1.1^2

=$50.18(Approx)

jeff jeffy answered 2 years ago
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