Question

Miller Juice, Inc. is not paying a dividend right now, but is expected to pay a $4.56 dividend three years from now. Investors expect that dividend to grow by 4% every year forever. If the required return on the stock investment is 14%, what should be the price of Miller Juice stock today?

Group of answer choices

$43.84

$53.69

$36.49

$47.42

Answer 1

Present Value of cashflows starting from year 3 and growing 4% forever is given by,

PV =

where D4 is dividend in year 4, i.e., the first cashflow after growth started

r is interest rate or required return = 14%

g is growth rate = 4%

D4 is calculated as

D4 = D3*(1+g)

where D3 is dividend in year 3 = 4.56

So, D4 = 4.56*1.04 = 4.7424

Hence, PV =

=

(***Note: This 47.424 is called as terminal value which is the present value of all forever dividends obtained in year 3, i.e., one year prior to D4)

= 32.01

(***Note: 32.01 is the present value today, i.e., 3 years prior to D3)

Hence, correct answer is 32.01 which is not given in any of the options above.