Answer:
Market price of share = $26.57
Explanation:
According to the dividend valuation model, the value of a stock is the present value of the expected future dividends from the stock discounted at the the required rate of return.
The required rate of return here is 15%
The dividend growth model a be applied to each of the years as appropriate.
The share price of Extreme Reaches Corp can be computed as follows:
Year working Present value of Dividend
1 3.00 × (1.15) ×(-1) = 2.61
2 5× (1.15)^(-2) = 3.78
3 7.50× (1.15^(-3) = 4.93
4 10.0× 1.15^(-4) = 5,72
5 to infinity <em> (see working) = </em><u> 9.52</u>
Present value <u>26.57</u>
Working
Present value of dividend from Year 5 to infinity
PV (in year 4) of dividend from year 5 to infinity = 2.50× 1/(1.15)= 16.66
Present value in year 0 = PV in year 4× 1.15^(-4)
Present value in year 4 = 16.66× 1.15^(-4) = 9.52
Market price of share = $26.57
