Question

Brickhouse is expected to pay a dividend of $3.55 and $2.62 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.7 percent. What is the stock price today if the required return is 12.1 percent?

a. $28.89
b. $25.73
c. $33.49
d. $30.98
e. $35.93

Answer 1

Answer: $30.98

Explanation:

Year 1 dividend = $3.55

Year 2 dividend = $2.62

Other years dividend ie. Year 3.... = $2.62(1 + 3.7%) = $2.62(1 + 0.037) = 2.71694

Stock price today will then be:

= 3.55/(1 + 0.121) + 2.62/(1+0.121)^2 + 2.71694/(1 + 0.121)^2(0.121 - 0.037)

= 3.166815 + 2.08492 + 25.73887

= $30.98 approximately