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Umnica [9.8K]
3 years ago
10

Brickhouse is expected to pay a dividend of $2.60 and $2.24 over the next two years, respectively. After that, the company is ex

pected to increase its annual dividend at 2.8 percent. What is the stock price today if the required return is 10.2 percent?
Business
1 answer:
Sholpan [36]3 years ago
6 0

Answer:

$29.83

Explanation:

This question requires application of dividend discount model, according to which current value of share is present value of dividends expected in future.

P0=\frac{Div1}{(1+r)^{1} }+\frac{Div2}{(1+r)^{2} }+\frac{V2}{(1+r)^{2} }

where V2 is the terminal value, present value of dividends growing at constant growth rate,

V2 = Div3 ÷ (r - g)

Div3 = $2.24 × (1 + 2.8%)

        = $2.30272

V2 = $2.30272 ÷ (0.102 - 0.028)

    = $2.30272 ÷ 0.074

    = $31.12

P0=\frac{2.60}{(1+0.102)^{1} }+\frac{2.24}{(1+0.102)^{2} }+\frac{31.12}{(1+0.102)^{2} }

P0=\frac{2.60}{1.102}+\frac{2.24}{1.214404}+\frac{31.12}{1.214404}

          = 2.36 + 1.84 + 25.63

= $29.83

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