Question

Vid Co., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a $12 per share dividend 10 years from today and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 13 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:Therefore the current stock price is
`P_(0)` = $44.384

Step-by-step explanation:

Stock price for
`9^(th)` year or
`P_(9)` is as follows:

`P_(9) = (Next Dividend\left ( D_(10) \right ))/((Required Rate(r) - Growth rate(g)))`

`P_(9)` =
`[(12)/((13-4))]`

`P_(9)` = $133.33

The current stock price or
`P_(0)` is

`P_(0)` =
`(P_(9))/((1 + Required rate of return)^9)`

`P_(0)` =
`(133.33)/((1 + 0.13)^9)`

`P_(0)` = $44.384

Therefore the current stock price is
`P_(0)` = $44.384