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Financial Management Please show formula and get calculation in detail ABC company just paid a dividend...

Financial Management

Please show formula and get calculation in detail

ABC company just paid a dividend of $3 per share. It is expected to grow at 20% for the next 2 years and then at 4% thereafter. The required rate of return is 6%. What is the price of Acme stock?

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Answer:

D0 = $3

D1 = 3(1+0.2) = 3.6

D2 = 3.6 * 1.2 = 4.32

Dt = 4.32 * (1+0.04)/(0.06 - 0.04) = 224.64

PV of these dvidends = 3 + 3.6/(1.06) + 4.32/(1.06)2 + 224.64/(1.06)2 = 3 + 3.39623 + 3.845 + 199.93 = 210.17123

Flowchart for calculation of stock price

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