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A stock will pay a dividend of $3.5 exactly one year from now. Future dividends will...

A stock will pay a dividend of $3.5 exactly one year from now. Future dividends will grow at 19% for the following 2 years and then a constant 4% every year thereafter. If the stock's required rate of return is 13.2%, what is a fair price for the stock today? Round your answer to the nearest penny.

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Answer #1

The price of the stock will be as follows:

= Dividend in year 1 / (1 + required rate of return)1 + Dividend in year 2 / (1 + required rate of return)2 + Dividend in year 3 / (1 + required rate of return)3 + 1 / (1 + required rate of return)3 [ ( Dividend in year 3 (1 + growth rate) / ( required rate of return - growth rate) ]

= $ 3.5 / 1.132 + ($ 3.5 x 1.19) / 1.1322 + ($ 3.5 x 1.192) / 1.1323 + 1 / 1.1323 x [ ($ 3.5 x 1.192 x 1.04) ] / (0.132 - 0.04) ]

= $ 3.5 / 1.132 + $ 4.165 / 1.1322 + $ 4.95635 / 1.1323 + $ 56.02830435 / 1.1323

= $ 3.5 / 1.132 + $ 4.165 / 1.1322 + $ 60.98465435 / 1.1323

= $ 48.38 Approximately

Feel free to ask in case of any query relating to this question

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