Question

Nuclear Inc. just paid a $2.75 dividend. Dividends are expected to grow by 30% in year 1, by 25% in year 2, and by 25% in year 3. After this, dividends are expected to grow at constant rate of 5% per year. If the required return for this stock is 9%, how much should the stock sell for today

Answer 1

Answer:

$124.58  

Explanation:

Year 1 dividend=$2.75*(1+30%)=3.575

Year 2 dividend =3.575 *(1+25%)=4.46875

Year 3 dividend=4.46875 *(1+25%)=5.5859375

Termina value=Year 3 dividend*(1+constant growth rate)/(required return-constant growth rate)

Termina value=5.5859375 *(1+5%)/(9%-5%)=146.6308594

stock price=3.575 /(1+9%)^1+4.46875 /(1+9%)^2+5.5859375 /(1+9%)^3+146.6308594 /(1+9%)^3

stock price=$124.58