Verizon just paid an annual dividend of $3. Analysts expect that the company will increase dividends at a rate of 9% per year during the next three years, and then increase at a constant rate of 2.5% forever. If the discount rate of Verizon is 12%, what is the price of Verizons stock today?
52.11
35.57
49.34
38.36
The price is computed as shown below:
= Dividend in year 1 / (1 + required rate of return)1 + Dividend in year 2 / (1 + required rate of return)2 + Dividend in year 3 / (1 + required rate of return)3 + 1 / (1 + required rate of return)3 [ ( Dividend in year 3 (1 + growth rate) / ( required rate of return - growth rate )]
= ($ 3 x 1.09) / 1.121 + ($ 3 x 1.092) / 1.122 + ($ 3 x 1.093) / 1.123 + 1 / 1.123 [ ( $ 3 x 1.093 x 1.025 ) / ( 0.12 - 0.025) ]
= $ 3.27 / 1.12 + $3.5643 / 1.122 + $ 3.885087 1.123 + $ 41.91804395 / 1.123
= $ 38.36 Approximately
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