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Sergeeva-Olga [200]
2 years ago
11

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
Business
1 answer:
Andrei [34K]2 years ago
7 0

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  

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The reason behind issuing corporate bonds for funding is , first they are the cheapest sources of finance after retained earnings. Companies are obligated to pay return on these hence for the security off return investors usually purchase them even at lower prices.

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The same should be considered and relevant too

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