Question

Winter Time Adventures just paid dividend $2 per share and is expected to increase dividends by 10% in three years. After that, dividend payment policy of the company is unknown. Assume that the PE ratio and EPS for year 3 are forecasted to be 8 and $6 respectively. If the required return is 20%, what is the price of the stock?

	A.	$30.83
	B.	$31.85
	C.	$34.83
	D.	$32.83
	E.	$35.83

Answer 1

- Dividend just paid(D0) = $2

Growth rate of dividend for next 3 years (g) = 10%

P/E ratio for year 3 = 8

P/E ratio = Stock Price/EPS

8 = Stock Price/$6

Stock Price = $48

So, Stock Price in year 3(P3) = $48

Required Return(ke) = 20%

Calculating the Price of Stock Today:-

P0 = 1.833 + 1.681 + 1.541 + 27.778

P0 = $32.83

SO, Price of Stock is $32.83

Option D

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