Question

The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (r s) is 11%, what is its current stock price

Answer 1

Answer:

Current stock price = $33.50

Explanation:

The Dividend Valuation Model(DVM) is a technique used to value the worth of an asset. According to this model, the value of an asset is the sum of the present values of the future cash flows would that arise from the asset discounted at the required rate of return.

Hence we will apply the model as follows:

For a single dividend :

PV = Future dividend × (1+r)^(-n)

Year                                          PV

1              1.25× 1.15^1× 1.11^(-1) =1.295

2             1.25× 1.15^2× 1.11^(-2)= 1.342

3              1.25× 1.15^3× 1.11^(-3)=  1.390

Present of dividend in year 4 and beyond:

This wild determined in two steps as follows:

Step 1 :Present Value in year 3 terms

PV = A × D× (1+r)/(r-g)

(1.25× 1.15^3× 1.06)/(0.11-0.06)=40.30

Step 2 :Present value in year 0

PV in year 0 = 40.30× 1.11^(-3)= 29.469

Current stock price = 1.295 + 1.342  + 1.390+29.469 =  33.496

Current stock price = $33.50