Question

Chartreuse County Choppers Inc. is experiencing rapid growth. The company expects dividends to grow at 25% per year for the next 11 years before leveling off at 6% into perpetuity. The required return on the company’s stock is 12%. If the dividend per share just paid was $1.74, what is the stock price?Answer:

Answer 1

Answer:

Stock price is $142.13

Explanation:

Given that:

Dividends (D) = $1.74

Dividend grow rate (g) = 25% = 0.25

Required return (R) = 12% = 0.12

Growth rate period (T) = 11 years

Perpetuity (p) = 6% = 0.06

Stock price = [D(1 + g) / (R-g)] {1 -[(1 + g) / (1 + R)]^T}+ [(1 + g)/(1 + R)]^T[D(1 + p)/(R-p)]

Substituting values:

Stock price = [1.74(1 + 0.25) / (0.12-0.25)] {1 -[(1 + 0.25) / (1 + 0.12)]¹¹}+ [(1 + 0.25)/(1 + 0.12)]¹¹[1.74(1 + 0.06)/(0.12 - 0.06)]

Stock price = [(-16.73) × (-2.34)] + [(3.35) ×(30.74)] = 39.1482 + 102.979 = $142.13

Stock price is $142.13