Question

g Red Sun Rising just paid a dividend of $2.80 per share. The company said that it will increase the dividend by 40% and 10% over the next two years, respectively. After that, the company is expected to increase its annual dividend at 5%. If the required return is 12%, what is the stock price today

Answer 1

Answer:

The stock price today is $58.50

Explanation:

First, we need to determine the dividends for each year

Year _____Working _________ Dividend

0________________________ $2.80 per share

1________$2.80 x ( 1 + 40% )___$3.92 per share

2________$3.92 x ( 1 + 10% )___$4.312 per share

3________$4.312 x ( 1 + 5% )___$4.5276 per share

Now we need to calculate the present value of each years dividend to calculate the value of stock

Year _____Working ___________________ PV of Dividend

1________$3.92/( 1 + 12% )^1_____________ $3.50

2________$4.312/( 1 + 12% )^2____________$3.4375

3________[$4.5276/(12%-5%)]/( 1 + 12% )^2__ $51.5625

Now sum all of the present vlue of dividend to calculate the stock price

Stock Price today = $3.50 + $3.4375 + $51.5625 = $58.50