Question

the last dividend paid by coppard inc. was $1.25. the dividend growth rate is expected to be constant at 35% for 3 years, after which dividends are expected to grow at a rate of 6% forever. if the firms required return rate is 11%, what is its current stock price?

Answer #1

Terminal value is the present value of dividends for year 4 and beyond. it's calculated at the end of year 3. so, it will be discounted for 3 years only.

Terminal value = [Year 3 dividend*(1+perpetual growth rate)]/(required return - perpetual growth rate)

perpetual growth rate is the dividend growth rate of 6% forever.

its current stock price is $53.29.

Year | Required Return | Dividend growth rate | Dividend | Terminal value | PV of dividends & Terminal value |

0 | 11% | $1.25 | |||

1 | 11% | 35% | $1.69 | $1.52 | |

2 | 11% | 35% | $2.28 | $1.85 | |

3 | 11% | 35% | $3.08 | $65.20 | $49.92 |

4 & beyond | 11% | 6% | $3.26 | ||

Current Stock price | $53.29 |

Calculations

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Please show all steps. Thank you!

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