Question

You have a stock which pays a $1.45 dividend which is expected to grow at 15% for the next four years, then at a constant 6% into the future, the discount rate is 10%.​  

Group of answer choices

53.46

57.49

61.37

55.36

52.39

Answer 1

The current value of the stock 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 + Dividend in year 3 / (1 + required rate of return)³ + Dividend in year 4/ (1 + required rate of return)⁴ + 1 / (1 + required rate of return)⁴[ ( Dividend in year 4 (1 + growth rate) / ( required rate of return - growth rate) ]

= ($ 1.45 x 1.15) / 1.10 + ($ 1.45 x 1.15²) / 1.10² + ($ 1.45 x 1.15³) / 1.10³ + ($ 1.45 x 1.15⁴) / 1.10⁴ + 1 / 1.10⁴ x [ ($ 1.45 x 1.15⁴ x 1.06) ] / (0.10 - 0.06) ]

= $ 1.6675 / 1.10 + $ 1.917625 / 1.10² + $ 2.20526875 / 1.10³ + $ 2.536059063 / 1.10⁴ + 1 / 1.10⁴ x [ $ 67.20556516 ]

= $ 1.6675 / 1.10 + $ 1.917625 / 1.10² + $ 2.20526875 / 1.10³ + $ 69.74162422 / 1.10⁴

= $ 52.39 Approximately

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