Question

A7X Corp. just paid a dividend of $2.10 per share. The dividends are expected to grow at 24 percent for the next eight years and then level off to a growth rate of 6 percent indefinitely. If the required return is 13 percent, what is the price of the stock today

Answer 1

Answer:

Price of stock = $46.26

Explanation:

Dividend in year 1 = 1.24 × 2.10 = 2.604

Year                                                                               PV of Dividend

1 to 8             2.604/ (0.13-0.24)) ( 1 - (1.24/1.13)^8)    = $26.10

9 to infinity        See working below                        = $20.260

Price of stock = 26.10 + 20.260

Price of stock = 46.26

Workings

PV of year 9 to infinity:

This will be done in two steps

Step 1

PV in year 8 terms

((2.10 × 1.24^ 8) × 1.06)/(0.13-0.06)

=  53.86

Step 2

PV in year 0 term

=$53.86 × 1.13^(-8)

= $20.260