Question

Sea Side, Inc., just
paid a dividend of $2.24 per share on its stock. The growth rate in
dividends is expected to be a constant 6.3 percent per year
indefinitely. Investors require a return of 20 percent on the stock
for the first three years, then a return of 15 percent for the next
three years, and then a return of 13 percent thereafter. What is
the current share price? **(Do not round intermediate
calculations. Round your answer to 2 decimal places.)**

Answer #1

Value of Stock is calculated by growing dividends at 6.3% per year, and discounting it by different required rates as given,

Then finding terminal value as 2.24(1.063)^{7}/(0.13 -
0.063)

Current Value of Stock = 2.24((1.063)/(1.20)) +
2.24((1.063)/(1.20))^{2} + 2.24((1.063)/(1.20))^{3}
+ 2.24((1.063)/(1.15))^{4} +
2.24((1.063)/(1.15))^{5} + 2.24((1.063)/(1.15))^{6}
+ 2.24(1.063)^{7}/(0.13 - 0.063)

Current Value of Stock = 1.98 + 1.76 + 1.56 + 1.63 + 1.51 + 1.40 + 51.27

**Current Value of Stock = $61.11**

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