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 |

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