Question

Verona Industries just paid a dividend of $0.95. You expect the dividend to grow at 18% for the next two years, and then the dividend will grow at 6.00% for the foreseeable future. You estimate the appropriate discount rate is 12.10%. Using this information you estimate the current price for Verona is closest to:

	A.	$21.50.
	B.	$29.37.
	C.	$23.83.

Answer 1

The price is computed as shown below:

= Dividend in year 1 / ( 1 + required rate of return)1 + Dividend in year 2 / ( 1 + required rate of return)2 + 1 / ( 1 + required rate of return)2 [ ( Dividend in year 2 (1 + growth rate) / ( required rate of return - growth rate) ]

= ($ 0.95 x 1.18) / 1.1210 + ($ 0.95 x 1.182) / 1.12102 + 1 / 1.12102 [ ($ 0.95 x 1.182 x 1.06) / (0.1210 - 0.06) ]

= $ 1.121 / 1.1210 + $ 1.32278 / 1.12102 + 1 / 1.12102 [ ($ 22.98601311) ]

= $ 1.121 / 1.1210 + $ 24.30879311 / 1.12102

= $ 20.34 Approximately

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