A stock is expected to pay the following dividends: $1.10 in 4 years, $1.70 in 5...

A stock is expected to pay the following dividends: $1.10 in 4 years, $1.70 in 5 years, and $1.75 in 6 years, followed by growth in the dividend of 5% per year forever after that point. There will be no dividends prior to year 4. The stock's required return is 11%. The stock's current price should be $_________.

* DO NOT ROUND INTERMEDIATE VALUES, NO CREDIT WILL BE GIVEN
* FINAL ANSWER IN DOLLARS, ROUNDED TO TWO DECIMAL PLACES

Expert Solution

As per dividend discount model, current price of dividend is present value of future dividends.

Step-1:Present value of dividend of 6 years

Year	Dividend	Discount factor	Present value
a	b	c=1.11^-a	d=b*c
4	$ 1.10	0.658731	$ 0.72
5	$ 1.70	0.593451	$ 1.01
6	$ 1.75	0.534641	$ 0.94

Total			$ 2.67

Step-2:Present value of dividends after year 6

Present value		=	D6(1+g)/(K-g)DF6			Where,
		=	$ 16.37			D6	$ 1.75
						g	5%
						K	11%
						DF6	0.534641

Step-3:Present value of all dividends

Present value of all dividends			=	$ 2.67	+	$ 16.37
			=	$ 19.04

The stock's current price should be $ 19.04

jeff jeffy answered 1 year ago

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