Answer:
P0 = $33.25558633 rounded off to $33.26
Explanation:
The stock price today or the price per share today can be calculated using the discounted cash flow approach or the dividend discount model. The DDM values the stock based on the present value of the expected future dividends from the stock. In the given scenario, the price of the stock will be calculated as follows,
P0 = D1 / (1+r) + D2 / (1+r)^2 + .... + Dn / (1+r)^n +
[ (Dn * (1+G) / (r - G)) / (1+r)^n }
Where,
- D1, D2 and so on will be calculated by applying the appropriate growth rates to D0 of $1.85
- r is the required rate of return
- G is the sustainable or constant growth rate
P0 = 1.85 * (1+0.24) / (1+0.14) + 1.85 * (1+0.24) * (1+0.18) / (1+0.14)^2 +
1.85 * (1+0.24) * (1+0.18) * (1+0.12) / (1+0.14)^3 +
[ (1.85 * (1+0.24) * (1+0.18) * (1+0.12) * (1+0.06) / (0.14 - 0.06)) / (1+0.14)^3 ]
P0 = $33.25558633 rounded off to $33.26
