Question

Firm X just paid a dividend of $2.50 today. Suppose that the firm’s dividend is expected to grow at a rate of 18 percent per year for the next three years. After that, dividend growth is expected to slow to 3 percent per year and remain at that level into the foreseeable future. If Firm X’s required return on equity is 11 percent, what is the price of Firm X's stock at the end of year 3. Note: P3 = Div4/(r - g)

Group of answer choices

$52.88

$48.24

$36.88

$83.23

Answer #1

Let me know if you need any clarification -

Computation of stock price at the end of 3rd year | |||||||

Price at end of 3rd year = Dividend in year 4/(required rate - growth rate) | |||||||

a | Dividend in year 4 = | $ 4.23 | |||||

2.5*((1+18%)^3)*(1+3%) | |||||||

b | required rate = | 11% | |||||

c | Growth rate = | 3% | |||||

d=a/(b-c) | Price at end of 3rd year = | $ 52.88 | |||||

Therefore answer is option |
$
52.88 |
||||||

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