Question

The In-Tech Co. just paid a dividend of $1 per share. Analysts expect its dividend to grow at 25 percent per year for the next three years and then 5 percent per year thereafter. If the required rate of return on the stock is 18 percent, what is the current value of the stock?

Answer 1

Answer:

Explanation:

D1 = $1(1+0.25) = 1.25

D2 = $1.25(1+0.25) = 1.5625

D3 = $1.5625(1+0.25) = 1.953

D4 = $1.953(1+0.25) = $2.05

Current value = P0 =

= 1.25/(1+0.18) + 1.5625/(1+0.18)^2 + 1.953/(1+0.18)^3 + 2.05/(0.18-0.05) * (1+0.18)^(-3) =

=$12.96

Current value of the stock is 12.96