Question

Ackert Company's last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (r_s) is 12.0%. What is the best estimate of the current stock price?

Answer 1

Solution:
Last Dividend (D0)= $ 1.55
Growth rate (for 2 years) (g)= 1.5%
Constant Growth Rate (g) = 8%
Required Return (ke) = 12%
Current Stock Price = ?
P0 = D1/( 1+Ke)^1+D2/ (1+ke)^2+ D3/(Ke-g)(1+Ke)^2
D1= D0(1+g)
D1= 1.55(1+0.015)= 1.57325
D2= D1(1+g)
D2= 1.57325(1+0.015)= 1.5968
D3= D2(1+g)
D3= 1.5968(1+0.08)= 1.7245
P0= 1.57325/(1.12)^1+1.5968(1.12)^2+1.7245/(0.12-0.08)(1.12)^2
P0= 1.57325*0.8929+1.5968*0.7972+43.11*0.7972
P0= $37.05
Current Stock Price (P0) = $ 37.05