Question

Vid Co., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a $12 per share dividend 10 years from today and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 13 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:Therefore the current stock price is $P_{0}$ = $44.384

Explanation:

Stock price for $9^{th}$ year or $P_{9}$ is as follows:

$P_{9} = \frac{Next Dividend\left ( D_{10} \right )}{(Required Rate(r) - Growth rate(g))}$

$P_{9}$ = $[\frac{12}{(13-4)}]$

$P_{9}$ = $133.33

The current stock price or $P_{0}$ is

$P_{0}$ = $\frac{P_{9}}{(1 + Required rate of return)^9}$

$P_{0}$ = $\frac{133.33}{(1 + 0.13)^9}$

$P_{0}$ = $44.384

Therefore the current stock price is $P_{0}$ = $44.384