Question

CX Enterprises has the following expected​ dividends:

$1.01

in one​ year,

$1.25

in two​ years, and

$1.33

in three years. After​ that, its dividends are expected to grow at

4.3%

per year forever​ (so that year​ 4's dividend will be

4.3%

more than

$1.33

and so​ on). If​ CX's equity cost of capital is

12.2%​,

what is the current price of its​ stock?

Answer 1

Current price of stock = Present Value of Dividends+ Present Value of Price at Year 3

= $ 12.43169330436160 +  $ 2.83473556277367

Answer = $ 15.27

Note:

Expected Price in Year 3 = Expected Dividend / (Required Return -Growth Rate)

= $1.33*(1+4.3%) / (12.2%-4.3%)

= $ 17.55936709

Present Value of Price in Year 3= Price in Year 3 * Present Value of Discounting Factor(Rate,time)

=$ 17.55936709 * 0.707980717165323

= $ 12.43169330436160

Present Value of Dividends:

Year	Dividend	Discounting Factor(12.2%)	Present Value
1	1.01	0.891265597147950	0.90017825311943
2	1.25	0.794354364659492	0.99294295582437
3	1.33	0.707980717165323	0.94161435382988
Present Value of Dividends	2.83473556277367