Question

Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today.

$85.60

$65.13

$63.80

$67.95

Answer 1

the stock should be worth $67.95 today
Statemnet showing Current Price
Particulars	Time	PVf 12%	Amount	PV
Cash inflows (Dividend)	1.00	0.8929	2.00	1.79
Cash inflows (Dividend)	2.00	0.7972	3.00	2.39
Cash inflows (Dividend)	3.00	0.7118	4.00	2.85
Cash inflows (Price)	3.00	0.7118	85.60	60.93
Current Price of Stock				67.95
P3= D4/(ke-g)
P3= 4*1.07/(12%-7%)
P3= 4.28/(5%)
P3 =$85.60