Question

Orwell building supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 13.00% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price? Select the correct answer. a. $36.36 b. $35.02 c. $37.03 d. $37.70 e. $35.69

Answer 1

Answer:

b. $35.02

Explanation:

The first dividends will be calculate by multiplying by the grow rate and bring them to present value:

first year:

D0 x (1+g)

1.75 x 1.13 = 1.977500

Then we calcualte the present value:

$\frac{Principal}{(1 + rate)^{time} } = PV$

1.9775/1.12 = 1.7656

second year:

D1 x (1+g)

1.9775 x (1.13) = 1.7656

$\frac{1.7656}{(1 + 0.12)^{2} } = PV$

PV: 1.7814

Finally,, we calcualte the present value of the next dividends using the dividend grow model

$\frac{divends}{return-growth} = Intrinsic \: Value$

We calcualte next year dividneds:

D2 x (1+g) = D3

1.9775 x 1.06 = 2.368650

g = 6%

and return 12%

$\frac{2.36865}{0.12-0.06} = Intrinsic \: Value$

39.47749167

then, we calcualte the present vale:

$\frac39.47749167}{(1 + 0.12)^{2} } = PV$

PV = 31.4712

Finally, we add all these values

1.7656 + 1.7814 + 31.4712 = 35,0182 = 35.02

This will be the estimate current stock price.