Question

A firm does not pay a dividend. It is expected to pay its first dividend of $0.10 per share in two years. This dividend will grow at 11 percent indefinitely. Using a 13 percent discount rate, compute the value of this stock.

Answer 1

Answer:

$4.504

Explanation:

Dividends do grow at a constant rate in definitely. Hence, price for year 2 will be:

Price2 =  D2 * (1 +g) / (r - g)

Price2 = 0.11 * (1+11%) / 0.13 - 0.11

Price2 = 0.11 * (1.11/ 0.13 - 0.11

Price2 = $5.55

Now, Price0 = Price2 / (1+r)^2

Price0 = $5.55 / (1.11)^2

Price0 = $4.504

Hence, the current value of this stock is $4.504