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Skull Island Adventures just paid a dividend of $2.10 per share. The dividend is expected to...

Skull Island Adventures just paid a dividend of $2.10 per share. The dividend is expected to grow at a rate of 22% per year for the next 3 years. Afterwards, the dividend is expected to grow at a rate of 5% indefinitely. The appropriate discount rate for the company is 14.0%. What is the value of the stock today (i.e. P0)?

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Answer #1

The correct answer is $ 37.25

Note : Value of Stock today = Present Value of Dividends + Present Value of Price at Year 4

Present Value of Dividends :

Year Dividend Discounting Factor (14%) Present Value ( Dividend * Discounting factor)
0 2.1
1 2.5620000 0.877192982 2.25
2 3.1256400 0.769467528 2.40508
3 3.8132808 0.674971516 2.57386
Present Value of Dividends 7.226302830021

Dividend at Year 4 = $ 3.8132808 * 105%

= $ 4.00394484

Price at Year 4 = 4.00394484 / ( 14% -5%)

= $ 44.488276

Present Value of Price at Year 4 =  $ 44.488276 * 0.674971516

= $ 30.0283191

Hence, the current value = $ 30.0283191 + $ 7.226302830021

= $ 37.25

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