Question

Phantom plans to pay annual dividends of $0.45, $0.60, and $0.75 a share in next three years, respectively. Afterwards, dividends are projected to increase by 1.5 percent per year. What is the market price of the stock today at a required return of 12.5 percent?

Answer #1

**The value of the stock is computed as shown
below:**

**= Dividend in year 1 / (1 + required rate of
return)**^{1}**+**
**Dividend in year 2 / (1 + required rate of
return)**^{2}**+ Dividend in
year 3 / (1 + required rate of
return)**^{3}**+ 1 / (1 +
required rate of return)**^{3}**[ ( Dividend in year 3 (1 + growth rate) / ( required rate
of return - growth rate) ]**

= $ 0.45 / 1.125 + $ 0.60 / 1.125^{2} + $ 0.75 /
1.125^{3} + 1 / 1.125^{3} x [ ($ 0.75 x 1.015) /
(0.125 - 0.015) ]

= $ 0.45 / 1.125 + $ 0.60 / 1.125^{2} + $ 0.75 /
1.125^{3} + $ 6.920454545 / 1.125^{3}

= $ 0.45 / 1.125 + $ 0.60 / 1.125^{2} + $ 7.670454545 /
1.125^{3}

**= $ 6.26 Approximately**

Feel free to ask in case of any query relating to this question

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