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alexira [117]
3 years ago
10

Orwell Building Supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% 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?
Business
1 answer:
EleoNora [17]3 years ago
8 0

Answer:

Best estimate of the current stock price= $42.64

Explanation:

Price of the stock today = \frac{D1}{(1+ke)^1}+\frac{D2}{(1+ke)^2}+\frac{P2}{(1+ke)^2}.

where P2 = \frac{D3}{ke-g}

D0=$1.75

D1=$1.75(1.25)

D2=$1.75(1.25)(1.25)

D3=$1.75(1.25)(1.25)(1.06)

Price of the stock today = \frac{1.75(1.25)}{(1+0.12)^1}+\frac{1.75(1.25)(1.25)}{(1+0.12)^2}+\frac{1.75(1.25)(1.25)(1.06)}{(0.12-0.06)(1+0.12)^2}. = $42.64

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