Question

The dividend for Should I, Inc., is currently $1.20 per share. It is expected to grow at 20 percent next year and then decline linearly to a perpetual rate of 5 percent beginning in four years. If you required a return of 16 percent on the stock, what is the most you would pay per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) The answer is not 4.70

Answer #1

Current dividend, D0 = $1.20

Growth rate in Year 1 is 20%, growth rate in Year 2 is 15%, growth rate in Year 3 is 10% and a constant growth rate (g) of 5% thereafter.

D1 = $1.2000 * 1.20 = $1.4400

D2 = $1.4400 * 1.15 = $1.6560

D3 = $1.6560 * 1.10 = $1.8216

D4 = $1.8216 * 1.05 = $1.91268

Required return, r = 16%

P3 = D4 / (r - g)

P3 = $1.91268 / (0.16 - 0.05)

P3 = $17.3880

P0 = $1.44/1.16 + $1.656/1.16^2 + $1.8216/1.16^3 +
$17.388/1.16^3

P0 = $14.78

So, current stock price is $14.78

The dividend for Should I, Inc., is currently $1.20 per share.
It is expected to grow at 20 percent next year and then decline
linearly to a perpetual rate of 5 percent beginning in four years.
If you required a return of 16 percent on the stock, what is the
most you would pay per share? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)

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It is expected to grow at 20 percent next year and then decline
linearly to a perpetual rate of 5 percent beginning in four years.
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calculations. Round your answer to 2 decimal places.)

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Please use these formulas:
https://www.chegg.com/homework-help/fundamentals-of-investments-7th-edition-chapter-6-problem-16qp-solution-9780077641788
I want to double check my work to see if it's correct.
Thanks.

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****show step****

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