Question

Navel County Choppers Inc. is experiencing rapid growth. The company expects dividends to grow at 15 percent per year for the next 11 years before leveling off at 6 percent into perpetuity. The required return on the company’s stock is 14 percent. If the dividend per share just paid was $2.07, what is the stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Stock price=$61.98

Year	Cash flow	Discount factor @14%	Present value
1	$       2.38	0.877	$       2.09
2	$       2.74	0.769	$       2.11
3	$       3.15	0.675	$       2.12
4	$       3.62	0.592	$       2.14
5	$       4.16	0.519	$       2.16
6	$       4.79	0.456	$       2.18
7	$       5.51	0.400	$       2.20
8	$       6.33	0.351	$       2.22
9	$       7.28	0.308	$       2.24
9	$       8.37	0.308	$       2.58
10	$       9.63	0.270	$       2.60
11	$    11.08	0.237	$       2.62
11	$ 146.74	0.237	$    34.72
Stock price			$    61.98

11th year cash flow=11.08*1.06/(.14-.06)=$146.74