Question

A company just paid a dividend of $1.20 per share at the end of the year. It is expected to grow at 12% per year for three years, after that it grows constantly at 6%. The cost of equity is 9.5%. What is the current price of stock?

Answer 1

The current price of the stock given the dividend, cost of equity and growth rates is $46.90.

What is the current stock price?

Thw two-stage dividend growth model would be used to determine the value of the stock.

First stage:

• dividend in Y1 = 1.20x 1.12 = 1.344
• dividend in Y2 = 1.20 x 1.12^2 = 1.505
• dividend in Y3 = 1.20 x 1.12^3 = 1.69

Second stage:

Y3 = (1.69 X 1.06) / (0.095 - 0.06) = 51.059

Find the present value of these cash flows

(1.344 / 1.095) + (1.505 / 1.095²) + (1.69 / 1.095³) + (51.059/1.095³) = $46.90

To learn more about the two stage dividend model, please check: brainly.com/question/26564273