In: Finance
A share of stock just recently released a dividend for $1.50 per share, and has expected growth rate of 4.30% in the next year, 1.60% in the second year, 4.00% in the third year and 4.80% in the fourth year. Finally the firm expects the growth to become 4.50% long-term thereafter. Given that the expected discount rate on these bonds is 24.90%, what is the expected price of this stock?
(a) $7.35
(b) $7.59
(c) $8.98
(d) $7.48
Also, are there any shortcuts to this problem, such as a way to solve it using a financial calculator? (I am using the ti-84 plus). Thank you.
The correct option is option D i.e. $7.48
Year | Dividend | Present Value (ke=24.9%) | Dividend Growth Rate (g) | |||
D0 | $ 1.50 | |||||
1 | D1 | $ 1.56 | D0x(1+g) | $ 1.25 | D1/(1+ke)^1 | 4.30% |
2 | D2 | $ 1.59 | D1x(1+g) | $ 1.02 | D2/(1+ke)^2 | 1.60% |
3 | D3 | $ 1.65 | D2x(1+g) | $ 0.85 | D3/(1+ke)^3 | 4.00% |
4 | D4 | $ 1.73 | D3x(1+g) | $ 0.71 | D4/(1+ke)^4 | 4.80% |
4 | P4 | $ 8.87 | D4x(1+g) / Ke-g | $ 3.65 | P4/(1+ke)^5 | 4.50% |
Present Value of cashflows | $ 7.48 |
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