Question

Joven Corp. is a young start-up company and therefore is not paying any dividends on the stock over the next 10 years. The company will start paying a $3 per share dividend at the end of year 11 and thereafter it will increase the dividends by 3% per year forever. If the required rate of return on this stock is 9%, what is the current (today’s) share price?

Question 10 options:

	17.08
	23.02
	21.12
	25.00
	20.00
	12.71
	14.64
	22.22
	30.01

Answer 1

Step 1 :	Share price at the end of year 10
	Stock price = D1 / r - g
	Where,
	D1 = Expected Dividend
	r= required rate of return
	g= growth rate
	=3/0.09-0.03
	=50
Step 2 :	Share price today
	PV= FV/(1+r)^n
	Where,
	FV= Future Value
	PV = Present Value
	r = Interest rate
	n= periods in number
	= $50/( 1+0.09)^10
	=50/2.36736
	= $21.12