Question

The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be constant at 2.5% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price? Select the correct answer.

a) $28.28

b)$29.50

c) $27.06

d) $28.89

e) $27.67

Answer 1

Last Dividend, D0 = $1.25

Growth rate for next 3 years is 2.50% and a constant growth rate (g) of 6.00% thereafter

D1 = $1.25000 * 1.0250 = $1.28125
D2 = $1.28125 * 1.0250 = $1.31328
D3 = $1.31328 * 1.0250 = $1.34611
D4 = $1.34611 * 1.0600 = $1.42688

Required Return, rs = 11.00%

P3 = D4 / (rs - g)
P3 = $1.42688 / (0.1100 - 0.0600)
P3 = $1.42688 / 0.0500
P3 = $28.53760

P0 = $1.28125/1.1100 + $1.31328/1.1100^2 + $1.34611/1.1100^3 + $28.53760/1.1100^3
P0 = $24.07