Question

Herbovore's Vegetarian Delites Corporation (HVD) plans to pay a dividend of $1.06. Dividends will grow at...

Herbovore's Vegetarian Delites Corporation (HVD) plans to pay a dividend of $1.06. Dividends will grow at a rate of 3.00% for 4 years then return to the normal growth rate of 1.00% for the foreseeable future. If the required rate of return is 8.00%, what is the current price (P0) of a share of HVD common stock?

Group of answer choices

$3.66

$16.31

$16.69

$15.95

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Homework Answers

Answer #1

Answer : $15.95

Calculation :

P0 = D1 / (1+ke)1 + D2 / ( 1+ke)2 + D3 / ( 1+ke)3 + D4 / ( 1+ke)4 + P4 / ( 1+ke)4

Where,

Ke = required rate of return

D1 =1.06

D2 = 1.06 * 1.03 = 1.0918

D3 = 1.0918 * 1.03 = 1.124554

D4 = 1.124554 * 1.03 = 1.15829062

P4 = D5 / ke - g

P4 = 1.15829062 * 1.01 / 0.08 - 0.01

P4 = 1.1698735262 / 0.07

P4 = 16.71247894571

P0 = 1.06 / 1.08 + 1.0918 / 1.082 + 1.124554 / 1.083 + 1.15829062 / 1.084 + 16.71247894571 / 1.084

P0 = 0.981481481481 + 0.936042524005 + 0.892707221968 + 0.851378183914 + 12.28417093932

P0 = 15.94578035069 or $15.95

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