Question

Your company paid a dividend of $2.00 last year. The growth rate is expected to be 4 percent for 1 year, 5 percent the next year, then 6 percent for the following year, and then the growth rate is expected to be a constant 7 percent thereafter. The required rate of return on equity (ks) is 10 percent. What is the current stock price?

Answer 1

Answer: Calculation of the dividends:- Year 1 = 2 * (1.04) = $ 2.08 Year 2 = 2.08 * (1.05) = $ 2.184 Year 3 = $ 2.184 * (1.06) = $ 2.31504 Year 4 = $ 2.31