Grow On, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid a dividend of $7.30. You believe that dividends will grow at a rate of 14% per year for three years, and then at a rate of 6% per year thereafter. You expect the stock will sell for $95.53 in three years. You expect an annual rate of return of 12% on this investment. If you plan to hold the stock indefinitely, what is the most you would pay for the stock now?
| $121.71 |
| $144.12 |
| $90.69 |
| $158.69 |
| $171.79 |
The most that i will be paying now will be the present value of the stream of dividends plus the given value at the end of the 3rd year.
The value of dividends in year 1 =$8.322 (7.3*1.14)
year 2 = $9.4871 ($8.322*1.14)
year 3 = $10.8153 ($9.4871*1.14)
The value at the end of 3 years is $95.53
The present value of the stock is :
$8.322/1.12 + $9.4871/1.12^2 + $10.8153/1.12^3 + $95.53/1.12^3
=$7.4304 + $7.5631 + 7.6981 + $67.9964
=$90.69
The correct option is option 3.
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