Question

# Purple Inc. recently paid a common stock dividend of \$3.00 (D0 = \$3.00). They expect their...

Purple Inc. recently paid a common stock dividend of \$3.00 (D0 = \$3.00). They expect their dividends to grow by 9% per year for 2 years. In year 3, they expect their dividends to start growing at a constant 4% per year forever. You require a 12% return on this stock. What is the most you would be willing to pay for this stock?

The price 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 + 1 / ( 1 + required rate of return)2 [ ( Dividend in year 2 (1 + growth rate) / ( required rate of return - growth rate) ]

= (\$ 3 x 1.09) / 1.12 + (\$ 3 x 1.092) / 1.122 + 1 / 1.122 [ ( \$ 3 x 1.092 x 1.04) / ( 0.12 - 0.04) ]

= \$ 3.27 / 1.12 + \$ 3.5643 / 1.122 + 1 / 1.122 [ ( \$ 46.3359 ) ]

= \$ 42.70 Approximately

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

#### Earn Coins

Coins can be redeemed for fabulous gifts.

##### Need Online Homework Help?

Most questions answered within 1 hours.