Question

Ackert Company's last dividend was $4.00. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price?a. $87.00b. $89.87c. $80.31d. $104.21e. $95.61

Answer 1

Answer:

First we need to use the ddm model when the growth rate is constant and find the price then,because the ddm model cannot be used when the growth rate  is not constant and then discount it back to present value at 12% which is the required return.

Last dividend = $4

Dividend one year from now = 4*1.015=4.06

Dividend 2 years from now = 4.06*1.015=4.12

Growth rate 2 years from now = 8%

R= 12%

Price = D*(1+G)/(R-G)

=4.12*(1+1.08)/(0.12-0.08)=4.45/0.04= 111.26

Price of stock 2 years from now $111.26, now we need to discount it to the present value. 111.26/1.12^2=88.69

Best estimate = b. $89.87

Explanation: