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DBP Inc. just paid a dividend of $4.05. The expected growth rate of dividend is 4...

DBP Inc. just paid a dividend of $4.05. The expected growth rate of dividend is 4 percent. The required return for investors in the first three years is 15 percent and 13 percent for the following three years. After those six years the required return is 11 percent. What is the current share price of the stock? The multiple choice answers are: a. 52.29 b. 56.34 c. 55.01 d. 51.65 I keep getting 33.92 so I know I'm doing something incorrect!

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Homework Answers

Answer #1

Last Dividend, D0 = $4.05
Growth Rate, g = 4.00%

D1 = $4.0500 * 1.04 = $4.2120
D2 = $4.2120 * 1.04 = $4.3805
D3 = $4.3805 * 1.04 = $4.5557
D4 = $4.5557 * 1.04 = $4.7379
D5 = $4.7379 * 1.04 = $4.9274
D6 = $4.9274 * 1.04 = $5.1245
D7 = $5.1245 * 1.04 = $5.3295

Required Return for first 3 years, r1 = 15%
Required Return for next 3 years, r2 = 13%
Required Return after 6 years, r3 = 11%

P6 = D7 / (r3 - g)
P6 = $5.3295 / (0.11 - 0.04)
P6 = $76.1357

P3 = $4.7379/1.13 + $4.9274/1.13^2 + $5.1245/1.13^3 + $76.1357/1.13^3
P3 = $64.3691

P0 = $4.2120/1.15 + $4.3805/1.15^2 + $4.5557/1.15^3 + $64.3691/1.15^3
P0 = $52.29

So, current stock price is $52.29

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