Question

If your stock paying annual dividends will pay a dividend D1 at t=1 of $1.93 and...

If your stock paying annual dividends will pay a dividend D1 at t=1 of $1.93 and have a growth rate of  10% between t=1 and t=2, and with a constant growth rate of 4% thereafter into the future, what should be the value of the stock at t=0 if the expected rate of return for the stock is 8%?  Notice that in this problem, expected dividends are given at t = 1, not t = 0! Answer to the nearest cent as in xx.xx and enter without the dollar sign

Homework Answers

Answer #1
Dividend Amount
D1 $           1.93
D2 $           2.12 1.93(1+0.1)
D3 $           2.21 2.123(1+0.04

P2 = D3/Ke-g

= 2.21/(0.08-0.04)

= 2.21/0.04

= 55.2

Amount PVF @8% Disc CF
D1 $           1.93 0.9259 $      1.79
D2 $           2.12 0.8573 $      1.82
P2 $         55.20 0.7938 $   43.82
Value of Stock at t= 0 $   47.43

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