Question

DBP Inc. just paid a dividend of $2.45. The expected growth rate of dividend is 5 percent. The required return for investors in the first three years is 12 percent and 10 percent for the following three years. After those six years the required return is 8 percent. What is the current share price of the stock?

Answer 1

Last Dividend, D0 = $2.45

Growth Rate, g = 5%

D1 = $2.4500 * 1.05 = $2.5725
D2 = $2.5725 * 1.05 = $2.7011
D3 = $2.7011 * 1.05 = $2.8362
D4 = $2.8362 * 1.05 = $2.9780
D5 = $2.9780 * 1.05 = $3.1269
D6 = $3.1269 * 1.05 = $3.2832
D7 = $3.2832 * 1.05 = $3.4474

Required Return for first 3 years, r1 = 12%
Required Return for next 3 years, r2 = 10%
Required Return after 6 years, r3 = 8%

P6 = D7 / (r3 - g)
P6 = $3.4474 / (0.08 - 0.05)
P6 = $114.9133

P3 = $2.9780/1.10 + $3.1269/1.10^2 + $3.2832/1.10^3 + $114.9133/1.10^3
P3 = $94.0943

P0 = $2.5725/1.12 + $2.7011/1.12^2 + $2.8362/1.12^3 + $94.0943/1.12^3
P0 = $73.44

So, current stock price is $73.44