Question

# A7X Corp. just paid a dividend of \$1.40 per share. The dividends are expected to grow...

 A7X Corp. just paid a dividend of \$1.40 per share. The dividends are expected to grow at 30 percent for the next 9 years and then level off to a growth rate of 8 percent indefinitely.

 If the required return is 14 percent, what is the price of the stock today?

Multiple Choice

• \$82.18

• \$2.72

• \$110.05

• \$107.89

• \$105.74

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 + Dividend in year 3 / (1 + required rate of return)3 + Dividend in year 4 / (1 + required rate of return)4 + Dividend in year 5 / (1 + required rate of return)5 + Dividend in year 6 / (1 + required rate of return)6 + Dividend in year 7 / (1 + required rate of return)7 + Dividend in year 8 / (1 + required rate of return)8 + Dividend in year 9 / (1 + required rate of return)9 + 1 / (1 + required rate of return)9 [ ( Dividend in year 9 (1 + growth rate) / ( required rate of return - growth rate) ]

= (\$ 1.40 x 1.30) / 1.141 +  (\$ 1.40 x 1.302) / 1.142 +  (\$ 1.40 x 1.303) / 1.143 +  (\$ 1.40 x 1.304) / 1.144 +  (\$ 1.40 x 1.305) / 1.145 +  (\$ 1.40 x 1.306) / 1.146 +  (\$ 1.40 x 1.307) / 1.147 +  (\$ 1.40 x 1.308) / 1.148 +  (\$ 1.40 x 1.309) / 1.149 + 1 / 1.149 x [ (\$ 1.40 x 1.309 x 1.08) / ( 0.14 - 0.08) ]

= \$ 1.82 / 1.141 + \$ 2.366 / 1.142 + \$ 3.0758 / 1.143 + \$ 3.99854 / 1.144 + \$ 5.198102 / 1.145 + \$ 6.7575326 / 1.146 + \$ 8.78479238 / 1.147 + \$ 11.42023009 / 1.148 + \$ 14.84629912 / 1.149 + \$ 267.2333842 / 1.149

= \$ 107.89 Approximately

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