The last dividend paid by Klein Company was $1.00. Klein's growth rate is expected to be a constant 8 percent for 2 years, after which dividends are expected to grow at a rate of 6 percent forever.

The last dividend paid by Klein Company was $1.00. Klein's growth rate is expected to be a constant 8 percent for 2 years, after which dividends are expected to grow at a rate of 6 percent forever. Klein's required rate of return on equity (rs) is 12 percent. What is the current price of Klein's common stock?

Solutions

Expert Solution

The value of the stock is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)¹ + Dividend in year 2 / (1 + required rate of return)² + 1 / (1 + required rate of return)² [ ( Dividend in year 2 (1 + growth rate) / ( required rate of return - growth rate) ]

= ($ 1 x 1.08) / 1.12 + ($ 1 x 1.08²) / 1.12² + ($ 1 x 1.08² x 1.06) / (0.12 - 0.06) ]

= $ 1.08 / 1.12 + $ 1.1664 / 1.12² + $ 20.6064 / 1.12²

= $ 1.08 / 1.12 + $ 21.7728 / 1.12²

= $ 18.32 Approximately

jeff jeffy answered 2 years ago

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