Question

HCC, Inc., expects its dividends to grow at 25 percent per year for the next seven years before levelling off to a constant 3 percent growth rate. The required return is 11 percent. What is the current stock price if the annual dividend per share that was just paid was $1.05

Answer 1

Answer:

the current stock price is $43.21

Explanation:

The computation is shown below:

Last Dividend = D0= $1.05

Required Return = rs = 11.00%

The growth rate for the next 7 years = 25%

Growth rate = 3%

Now

D1 = $1.0500 × 1.25 = $1.3125

D2 = $1.3125 × 1.25 = $1.6406

D3 = $1.6406 × 1.25 = $2.0508

D4 = $2.0508 × 1.25 = $2.5635

D5 = $2.5635 × 1.25 = $3.2044

D6 = $3.2044 × 1.25 = $4.0055

D7 = $4.0055 × 1.25 = $5.0069

D8 = $5.0069 × 1.03 = $5.1571

Now

P7 = D8 ÷ (rs - g)

P7 = $5.1571  ÷ (0.11 - 0.03)

P7 = $64.4638

Now

P0 = $1.3125 ÷ 1.11 + $1.6406 ÷ 1.11^2 + $2.0508 ÷ 1.11^3 + $2.5635 ÷ 1.11^4 + $3.2044 ÷ 1.11^5 + $4.0055 ÷ 1.11^6 + $5.0069 ÷ 1.11^7 + $64.4638  ÷ 1.11^7

P0 = $43.21

Hence, the current stock price is $43.21