- This topic has 3 replies, 3 voices, and was last updated Jan-186:36 pm by
.
-
Posts
-
-
Up2
Dividends on a stock are expected to grow at 25% for three years, after which, they are expected to grow at 3% per annum, indefinitely. If the last dividend paid was $1.25 and the required return rate is 12%, the value of the stock is
- $24.58
- $32.63
- $28.91
-
Up2
I don’t think this is right.
-
Up1
Actually its $32.63. Right?
-
Up1
The answer is 24.58. Here is the calculation:
Yr 1 Div: 1.25*1.25 = 1.56
Yr 2 Div: 1.5625*1.25 = 1.95
Yr 3 Div: 1.95*1.25 = 2.44
Yr 4 Div: 2.44*1.03 = 2.51The trick is to value the stock at the end of yr 3 when there is level growth and add to the first 3 years worth of dividends.
EOY 3 value= 2.51/(.12-.03) = 27.94
PV = 1.56/1.12 + 1.95/1.12^2 + 2.44/1.12^3 + 27.94/1.12^3 = 24.58
-
Viewing 3 reply threads
- You must be logged in to reply to this topic.