Question

Dumbo Inc. just paid a dividend of $2.70. The company expects a super growth of 6%...

Dumbo Inc. just paid a dividend of $2.70. The company expects a super growth of 6% for the first 4 years and expect to grow at a constant rate of 3% after that IF the current Ke is 6.5%, what is the expected price of this stock today?

100.31

104.52

67.59

88.65

92.69

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Answer #1

Year 1 dividend = 2.7 * 1.06 = 2.862

Year 2 dividend = 2.862 * 1.06 = 3.03372

Year 3 dividend = 3.03372 * 1.06 = 3.21574

Year 4 dividend = 3.21574 * 1.06 = 3.40869

Year 5 dividend = 3.40869 * 1.03 = 3.51095

Value at year 4 = D5 / Required rate - growth rate

Value at year 4 = 3.51095 / 0.065 - 0.03

Value at year 4 = 100.31281

Expected price = 2.862 / (1 + 0.065)1 + 3.03372 / (1 + 0.065)2 + 3.21574 / (1 + 0.065)3 + 3.40869 / (1 + 0.065)4 + 100.31281 / (1 + 0.065)4

Expected price = $88.65

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