Answer:
The value of the stock today is closest to $53.15
Explanation:
Under the Gordon Growth Model, the share price of share can be calculated as follow
Price of share = D / ( k - g )
Where:
D = End of the first period Dividend
k = Required Rate of Return
g = Expected growth rate
g can be calculated as follow
g = Retention Rate x and ROE
g = ( 1- Dividend Payout Ratio ) x ROE
g = ( 100% - 40% )x 15% = 60% x 15% = 9%
D = $2
k = 12%
Dividends will start at year 3. This will be after 2 years of the end of the year dividend.
Year 3 share Price = $2 / ( 12% - 0.09% )
Year 3 share Price = $66.67
Discounting the year 3 share price back to today's value,
Today's share price = Year 3 share Price / ( 1 + required ROR )^n
Today's share price = 66.67 / ( 1 + 12% )^2
Today's share price = $53.15
