Question

Orwell building supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 19.00% 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

Answer 1

Answer:

$38.74

Explanation:

Div₀ = $1.75

Div₁ = $2.0825

Div₂ = $2.4782

Div₃ = $2.6269 and grow at a 6% constant rate forever

required rate of return = 12%

using growing perpetuity formula to determine the terminal value of the stock in year 2 = $2.6269 / (12% - 6%) = $43.78

the stock's current price = $2.0825/1.12 + $2.4782/1.12² + $43.78/1.12² = $1.86 + $1.98 + $34.90 = $38.74