Question

Grow On, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid a dividend of $4.10. You believe that dividends will grow at a rate of 25% per year for three years, and then at a rate of 6% per year thereafter. You expect the stock will sell for $127.32 in three years. You expect an annual rate of return of 16% on this investment. If you plan to sell the stock in three years, what is the most you would pay for the stock now

Answer 1

- Dividend Paid(D0) = $ 4.10

Growth rate for 3 years(g) = 25%

Growth rate thereafter (g1) = 6%

Required rate of return (Ke) = 16%

Calculating the price of stock in 3 years:-

P3 = $ 84.88

So, expected price of Stock in 3 years is $ 84.88 while the stock is selling for $ 127.32 in 3 years.

Hence, the most would pay for the stock now is $ 84.88

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