Question

The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 24% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rS) is 12%. What is the best estimate of the current stock price?

Answer 1

Answer:

Explanation:

$\left[\begin{array}{ccc}Year&Dividends&Present Value\\1&2.17&1.9375\\2&2.6908&2.14509\\3&108.33&77.109\\Intrinsic&Value&81.192\\\end{array}\right]$

The first and second year are calculate given the fact it will grow at 24%

then the third year will be calculate usign the gordon model:

$\frac{divends}{return-growth} = Intrinsic \: Value$

where growth is 6%

and rate = 12%

Then becuse this values are in the future, we need to take them to present value

$\frac{Principal}{(1 + rate)^{time} } = PV$

for example year 2

$\frac{2.6908}{(1 + 0.12)^{2} } = 2.14509$