Answer:
Stock price today = $174.34
Explanation:
Given:
Current Dividend = $3
Growth rate in year 2 = 10% = 0.1
Growth rate in year 3 = 4% = 0.04
Computation:
Dividend in year 2 = Current Dividend(1 + Growth rate in year 2)²
Dividend in year 2 = 3(1+0.1)²
Dividend in year 2 = $3,63
Dividend in year 3 = Dividend in year 3(1 + Growth rate in year 3)
Dividend in year 3 = $3.63(1 + 0.04)
Dividend in year 3 = $3.7752
Stock Price in year 2 = Dividend in year 3 / (Investors required return - Growth rate in year 3)
Stock Price in year 2 = $3.7752 / (6% - 4%)
Stock Price in year 2 = $188.76
Stock price today = [D1 / (1 + Required return)] + [D2 / (1 + Required return)² ] + [S2 / (1 + Required return)²]
Stock price today = $174.34
