Question

Nachman Industries just paid a dividend of D 0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?
a. $41.59
b. $42.65
c. $43.75
d. $44.87
e. $45.99

Answer 1

Answer:

option D

Explanation:

End of                 PV Calculation                         PV of Dividend

Year                 (Div     x       PVIF9%,n)

1                     $1.32(1.30) = $1.716 x 0.9174                        $1.574

2                    $1.716(1.10) = $1.8876 x 0.8417                    $ 1.588

                                                                                           $3.162

Value of stock at the end of year 2 =  $1.9820/0.04 = $49.55

P V of $38.275 at the end of year 2 = $49.55(PVIF 9%,2) = $41.71

∴ V =  $3.162 + $41.71 = $44.87

Hence, the correct answer is option D