Question

The dividend for Should I, Inc., is currently $1.65 per share. It is expected to grow at 12 percent next year and then decline linearly to a perpetual rate of 3 percent beginning in four years. If you required a return of 15 percent on the stock, what is the most you would pay per share?

Answer #1

Current Dividend, D0 = $1.65

Growth rate for year 1 is 12%, for year 2 is 9%, for year 3 is 6% and for year 4 and onward a constant growth rate (g) of 3%.

D1 =
$1.6500 * 1.12 = $1.8480

D2 = $1.8480 * 1.09 = $2.0143

D3 = $2.0143 * 1.06 = $2.1352

D4 = $2.1352 * 1.03 = $2.1993

Required Return, rs = 15%

P3 = D4
/ (rs - g)

P3 = $2.1993 / (0.15 - 0.03)

P3 = $2.1993 / 0.12

P3 = $18.3275

P0 =
$1.848/1.15 + $2.0143/1.15^2 + $2.1352/1.15^3 +
$18.3275/1.15^3

P0 = $16.58

Therefore, current stock price is $16.58

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Please use these formulas:
https://www.chegg.com/homework-help/fundamentals-of-investments-7th-edition-chapter-6-problem-16qp-solution-9780077641788
I want to double check my work to see if it's correct.
Thanks.

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