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Rapid City Motors Co. expects to grow at 20% for two years. After that it expects...

  1. Rapid City Motors Co. expects to grow at 20% for two years. After that it expects 8% growth indefinitely. The firm recently declared a $4.00 annual dividend. Similar stocks return about 12%. How much should a share of Rapid City be worth today? no graphing calculator or excel, show work

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Answer #1

We can calculate the Rapid city's stock price by dividend discount model:

Last dividend = $4.00

Growth rate for next two years = 20%

Constant growth rate after two years (g) = 8%

Required return (k) = 12%

Thus, Current value of stock (P0) would be:

A share of Rapid city is worth $132.86 today.

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.

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