Answer:
The market value of the stock is $132.73.
Explanation:
D0 = Dividend just paid = $4
D1 = Anticipated next year dividend or Year 1 dividend = $6
D2 = Dividend of in the subsequent year or Year 2 = $7
D3 = Year 3 dividend = D2 * (100% + Dividend growth rate forever) = $7 * (100% + 5%) = $7.35
Sum of present values of D1 and D2 = (D1 / (100% + required rate of return)^1) + (D2 / (100% + required rate of return)^2) = ($6 / (100% + 10%)^1) + ($7 / (100% + 10%)^2) = $11.2396694214876
Stock price in year 2 = D3 / (Required rate of return - Dividend growth rate forever) = $7.35 / (10% - 5%) = $147
Present value of Stock price in year 2 = Stock price in year 2 / (100% + required rate of return)^2 = $147 / (100% + 10%)^2 = $121.487603305785
Market value of the stock = Present value of Stock price in year 2 + Sum of present values of D1 and D2 = $121.487603305785 + $11.2396694214876 = $132.73
Therefore, the market value of the stock is $132.73.
