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
Present Value of cashflows starting from year 3 and growing 4% forever is given by,
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)
(***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.
Get Answers For Free
Most questions answered within 1 hours.