Question

Your firm is about to announce that it will pay its first dividend of $1.25 per share in three years. Afterward, the dividend will grow at 6.5%. If the market requires a 9.5% return for your stock, what should be your stock price after the announcement? A. $34.75 B. $31.74 C. $37.01 D. $41.67

Answer 1

Correct Option is C $37.01

Intrinsic Value of Stock Price can be find by the Dividend Growth model Formulae as it has growing dividend after three year or Perpetuity with growth formula

0 ......1........2......3..... Growing Dividend

P = Dividend (3rd year ) with growth / (r-g) or Perpetuity with growth formula

Where r is Reqired rate of Return

g stand for growth

P = Price of Stock

P= (1.25+6.5%)/(9.5-6.5)%

P =$ 41.67 but this value will be after 3 year when the dividend will be paid, this is the third year value i.e 2nd year end value hence we have to discount is to 2 year

Present Value of this Share Price = $44.375 *1/(1.095)²

=44.375*0.8340

=$37.01....