Question

In: Finance

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

(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.

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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