Question

Brickhouse is expected to pay a dividend of $3.00 and $2.40 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.6 percent. What is the stock price today if the required return is 11 percent?

Answer 1

Answer:

$31.9211

Explanation:

We discount the future two year dividends at the required rate of return

and solve for the present value of the infinite series of dividends growing at 3.6% with the dividend grow model:

$\frac{D_1}{r-g} =PV$

$\frac{2.4 (1.036)}{0.11-0.036} = PV$

PV 33.6

Then we discount this by the two years ahead of time these cashflow start and add them to get the PV of the stock which is their intrinsic market value

$\left[\begin{array}{ccc}Year&cashflow&PV\\&&\\1&3&2.7027\\2&2.4&1.9479\\2&33.6&27.2705\\&TOTAL&31.9211\\\end{array}\right]$