Question

Daniel Custom​ Cycles' common stock currently pays no dividends. The company plans to begin paying dividends beginning 3 years from today. The first dividend will be​ $3.00 and dividends will grow at 5 percent per year thereafter. Given a required return of 15​ percent, what would you pay for the stock​ today?

Answer 1

Answer:

stoke price in 2 year is $30

current stoke price is $22.68

Explanation:

Given data

dividend in 3 year = $3.00

grow rate = 5% = 0.05

return = 15% = 0.15

to find out

pay for the stock​ today

solution

we know there is no dividends for first 3 year after they need to pay

so first we calculate stoke price in 2 year from this formula i.e.

stoke price = dividend in 3 year /  ( return rate - grow rate )

put these value

stoke price = 3 /  ( 0.15 -  0.05 )

stoke price in 2 year is $30

now we calculate current price for stoke by discounting stoke in 2 year by this formula to 2 year

current stoke price = stoke price in 2 year  / (1 + return rate )²

current stoke price = 30  / (1 +  0.15 )²

current stoke price is $22.68