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A stock will pay no dividends for the next 3 years. Four years from now, the...

A stock will pay no dividends for the next 3 years. Four years from now, the stock is expected to pay its first dividend in the amount of $1.9. It is expected to pay a dividend of $3 exactly five years from now. The dividend is expected to grow at a rate of 7% per year forever after that point. The required return on the stock is 15%. The stock's estimated price per share exactly TWO years from now, P2 , should be $______.

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Answer #1

In this question we have to find out the estimated value of share at the end of year 2. For which we will discount the dividend receivable at the end of year 3,4&5 @ 15%(ie required rate of return). Then after dividend will grow constantly @7% hence we calculate price of share (ie D1/Ke-g) at the end of 5th year and discount it by the P. V. F. of 5th year.

Calculations have done in the attached file.

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