Question

Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today.

Answer 1

Answer:

$67.95

Explanation:

First, find the dividend per year;

D1 = $2

D2= $3

D3= $4

D4= D3(1+g) = 4(1.07) = $4.28

Next, find the PV of each dividend given a rate of 12%

PV (D1) =2 / (1.12) = 1.7857

PV (D2) = 3/ (1.12²)= 2.3916

PV (D3) = 4/ (1.12³) = 2.8471

PV (D4 onwards) = $\frac{\frac{4.28}{(0.12-0.07)} }{(1.12)^{3} } \\ \\ = \frac{85.6}{1.4049} \\ \\ =60.9296$

Price = 1.7857+ 2.3916 + 2.8471 + 60.9296

Therefore, the stock should be worth $67.95