Question

The last dividend paid by Wilden Corporation was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price?a. $37.05b. $38.16c. $39.30d. $40.48e. $41.70

Answer 1

Answer: The correct answer is "a. $37.05"

Explanation:

1) 1,55 x (1 + 0,015) = 1.5733 Div1

1,57 x (1+ 0,015) = 1.5968 Div2

1,5968 x (1+0,08) = 1.7246 Div3

2) We use the dividend formula that grows at a "g" rate in perpetuity:

V = 1,7246 / (0,12 - 0,08) = 43.115

So Div2 = 43.115 + 1,5968 = 44,7118

3) We use the Cash Flow function of the financial calculator:

Div0 = 0

Div1 = 1,57

Div2 = 44,7118

i% = 12

Net present value = $37,05

Or we calculate manual = 1.5733 /(1 + 0,12) + (1.5968 + 43.115) / (1+0,12)^2

=$37.05