Question

g last paid a $1.50 per share annual dividend. The company is planning on paying $3.00, $5.00, $7.50, and $10.00 a share over the next four years, respectively. After that the dividend will be a constant $2.50 per share per year. What is the market price of this stock if the market rate of return is 15%?

Answer 1

Answer:

The market price of the stock today is $26.57

Explanation:

The market price of the stock can be calculated based on the DDM approach. The expected dividends will be discounted back to present value along with the terminal value where dividend growth becomes zero.

The price of the stock is,

P0 = 3 / (1+0.15)  +  5 / (1+0.15)^2  +  7.5 / (1+0.15)^3  +  10 / (1+0.15)^4  + [(2.5/0.15) / (1+0.15)^4]

P0 = $26.567  rounded off to $26.57