A share of stock just recently released a dividend for $1.50 per share, and has expected...

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

(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.

Solutions

Expert Solution

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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jeff jeffy answered 1 year ago

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