Question

Lifecycle motorcycle company is expected to pay a dividend in year 1 of $2.00, a dividend in year 2 of $3.00, and a dividend in year 3 of $4.00. after year 3, dividends are expected to grow at the rate of 7% per year. an appropriate required return for the stock is 12%. using the multistage ddm, the stock should be worth __________ today. $63.80 $65.13 $67.95 $85.60

Answer 1

The stock should be worth $43.39 today using the multistage dividend discount model.

Step-by-step explanation:

To determine the value of a stock using the multistage dividend discount model (DDM), we need to calculate the present value of all expected future dividends. First, we calculate the present value of the dividends expected in years 1 to 3 using the formula:

Present Value of Dividends = Dividend / (1 + Required Return) ^ Year

For example, the present value of the dividend in year 1 would be $2.00 / (1 + 0.12) ^ 1 = $1.79. We then calculate the present value of all future dividends expected to grow at a 7% rate using the formula:

Present Value of Future Dividends = Dividend * (1 + Growth Rate) / (Required Return - Growth Rate)

In this case, the present value of future dividends would be $4.00 * (1 + 0.07) / (0.12 - 0.07) = $41.60.

Finally, we sum up the present values of all dividends to get the stock's present value: $1.79 + $41.60 = $43.39. Therefore, the stock should be worth $43.39 today.