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
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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