Question

Bruin Corporation is expected to pay the following dividends over the next 3 years: $1.72, $10 and $3.60. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 12 percent, what is the current share price?

a. 47.61

b. 42.36

c. 69.51

d. 50.51

e. 73.54

Please show workings using Excel

Answer 1

> Formula

As per two stage divided discount model,

Price = Dn / ( 1 + K )n + Dn+1 / [ ( K - g ) ( 1 + K )n ]

> Calculation

Price = [ D1 / ( 1 + K ) ] + [ D2 / ( 1 + K )2 ] + [ D3 / ( 1 + K )3 ] + [ D3 * (1+g) / ( K - g ) ( 1 + K )3 ]

          = [ 1.72 / 1.12 ] + [ 10 / 1.122 ] + [ 3.6 / 1.123 ] + [ ( 3.6 * 1.05 ) / { (.12 - 0.05 ) * ( 1.123 ) } ]

          = 1.5357 + 7.9719 + 2.5624 + 38.4361

          = $ 50.51 Answer

The option C is correct.

Hope you understand the solution.