Question

Q2 A company has a 11.00% required rate of return and will not pay any dividends for the next seven years. At the beginning of year 8, it will pay a dividend of $2.50 per share. The dividend (always paid at the beginning of a year) is expected to grow at 7.50% annually from that point onwards. Calculate the stock price today.
Question 2 options: $37.23
$38.19
$39.14
$40.10
$41.05

Answer 1

Value at t6 = 2.50/(0.11-0.075) =	$             71.43
As the first dividend is paid at BOY 8, it is EOY 7. Applying the formula
for PV of growing annuity [as above] the discounted value at EOY 6
is got. This value has to be discount for 6 years to get the stock price
today.
Stock price today = 71.43/1.11^6 =	$             38.19