Question

Brickhouse is expected to pay a dividend of $3.65 and $2.66 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.3 percent. What is the stock price today if the required return is 12.3 percent

Answer 1

Answer:

The stock price today is $ 29.56

Explanation:

Dividend for year 1, d₁ = $ 3.65

Dividend for year 2, d₂ = $ 2.66

Required rate = 12.3% = 0.123

Growth rate = 3.3% = 0.033

Value after year 2= (d₂ × Growth rate) ÷ (Required rate - Growth rate)

= (2.66 × 1.033) ÷ (0.123 - 0.033)

=30.5308889

Hence current price = Future dividend and value × Present value of discounting factor(rate%,time period)

= (3.65÷1.123) + (2.66÷$1.123^2$ ) + (30.5308889 ÷$1.123^2$ )

=$29.56