Answer:
P0 = $77.397794 rounded off to $77.40
Explanation:
The two stage growth model of DDM will be used to calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,
P0 = D0 * (1+g1) / (1+r) + D0 * (1+g1)^2 / (1+r)^2 + ... + D0 * (1+g1)^n / (1+r)^n + [(D0 * (1+g1)^n * (1+g2) / (r - g2)) / (1+r)^n]
Where,
- g1 is the initial growth rate
- g2 is the constant growth rate
- D0 is the dividend paid today or most recently
- r is the required rate of return
P0 = 1.89 * (1+0.23) / (1+0.15) + 1.89 * (1+0.23)^2 / (1+0.15)^2 +
1.89 * (1+0.23)^3 / (1+0.15)^3 +
1.89 * (1+0.23)^4 / (1+0.15)^4 +
1.89 * (1+0.23)^5 / (1+0.15)^5 + 1.89 * (1+0.23)^6 / (1+0.15)^6 +
1.89 * (1+0.23)^7 / (1+0.15)^7 + 1.89 * (1+0.23)^8 / (1+0.15)^8 +
1.89 * (1+0.23)^9 / (1+0.15)^9 + 1.89 * (1+0.23)^10 / (1+0.15)^10 +
[(1.89 * (1+0.23)^10 * (1+0.07) / (0.15- 0.07)) / (1+0.15)^10]
P0 = $77.397794 rounded off to $77.40
