Question

A7X Corp. just paid a dividend of $2.40 per share. The dividends are expected to grow at 16 percent for the next eight years and then level off to a growth rate of 6 percent indefinitely. If the required return is 15 percent, what is the price of the stock today

Answer 1

Answer:

50.26

Explanation:

We can calculate the price of the stock by summing up the present values of all years. To calculate PV of each year we need to grow the dividend value by 6% and then multiply it to the Present value factor.

Year   D0 Value of dividend   PVF (15%)            Value

1    D1                   2.78                 0.869                         2.42

2    D2           3.23                 0.756                              2.44

3    D3            3.75                 0.657                         2.46

4    D4            4.35                 0.571                               2.48

5    D5             5.04                 0.497                         2.51

6       D6             5.85                 0.432                         2.53

7    D7             6.78                 0.375                         2.55

8    D8              7.87                 0.326                         2.57

9    D9              8.34                 0.09                      30.29

Stock value                                                          50.26