Question

Currently, a company is not paying a dividend. It will start paying a $2.20 dividend per share in two years. After that, the dividend is expected to grow at a constant rate of 3% per year. The required return is 8%. What is the current value of the company’s stock?

Answer #1

Expected Dividend in 2 years (D2) = $2.20

Growth rate of Dividend therafter (Ke) = 3%

Required rate of Return(Ke) = 8%

Calculating the Price of Stock (at t=1) or in 1 year:-

P1 = $44

Now Calculating the Price today from Price in 1 year(t=1):-

P0 = P1/(1+Ke)

= $44/(1+0.08)

**= $40.74**

**So, the Current Value of Stock is $40.74**

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