Assume today is December 31, 2013. Imagine Works Inc. just paid a dividend of $1.40 per share at the end of 2013.

Assume today is December 31, 2013. Imagine Works Inc. just paid a dividend of $1.40 per share at the end of 2013. The dividend is expected to grow at 12% per year for 3 years, after which time it is expected to grow at a constant rate of 5% annually. The company's cost of equity (r_s) is 10%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company's stock today (December 31, 2013)? Do not round intermediate calculations. Round your answer to the nearest cent.

Expert Solution

D1=(1.4*1.12)=1.568

D2=(1.568*1.12)=1.75616

D3=(1.75616*1.12)=1.9668992

Value after year 3=(D3*Growth rate)/(Cost of equity-Growth rate)

=(1.9668992*1.05)/(0.1-0.05)

=41.3048832

Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=1.568/1.1+1.75616/1.1^2+1.9668992/1.1^3+41.3048832/1.1^3

=$35.39(Approx)

jeff jeffy answered 2 years ago

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