Answer:
The value of the stock today is $60.48 and option A is the correct answer.
Explanation:
The two stage growth model of DDM will be used to calculate the value of this stock today. The two stage growth model is used when there are 2 different dividend growth rates. The 30% growth rate can be termed as g1 while the 7% growth rate which is assumed to remain constant forever can be termed as g2.
The formula for price/value under this model is,
Value or P0 = D1 / (1+r) + D2 / (1+r)^2 + ... + Dn / (1+r)^n +
[Dn * (1+g2) / (r - g2)] / (1+r)^n
Value today = 0.8 * (1+0.3) / (1+0.1) + 0.8 * (1+0.3)^2 / (1+0.1)^2 +
0.8 * (1+0.3)^3 / (1+0.1)^3 + 0.8 * (1+0.3)^4 / (1+0.1)^4 +
[ (0.8 * (1+0.3)^4 * (1+0.07) / (0.1 - 0.07)) / (1+0.1)^4 ]
Value today = $60.60 which is closest to $60.48 and A is the answer.
The difference of $0.12 in the answer is because of the rounding off as the immediate calculations were not rounded off in the calculation of $60.60
