Question

A firm just paid an annual dividend of $1.00 today. The dividend is expected to growth at a rate of 14% for the next three years, and then 6% thereafter. The required rate of return on this stock is 9%. What is the value of this stock? Round to the nearest cent. Do not include the dollar sign in your answer. (i.e. If your answer were $1.23, then type 1.23 without a $ sign)

Answer 1

Answer:

Value of stock is $49.33

Explanation:

Dividend valuation method is used to calculate the the value of stock based on the dividend paid, its growth rate and rate of return.

Calculate dividend after 3 years first

Current Dividend = D0 = $1

Dividend after 3 year = D3 = D0 ( 1 + g )^n = $1 ( 1 + 0.14 )^3 = $1.48

Rate of return = r = 9%

Growth = g = 6%

DVM Formula for stock value

Price  = Dividend / Rate of return - Growth rate

Price of stock = D3 / ( r - g ) = $1.48 / ( 9% - 6% ) = $1.48 / 3% = $49.33