Question

Tony Company has just paid annual dividend of $1.00. Tony’s growth rate is expected to be a constant 10 percent for 2 years, after which dividends are expected to grow at a rate of 20 percent forever. Given the 30 percent discount rate. What is the current price of Tony’s common stock?

Answer 1

Current price = $10.15

Step-by-step explanation:

Given data:

Annual dividend $1.00

growth rate 10% for 2 year then 20%

Therefore,

1st Year dividend = 1 * 1.1 = 1.1

2nd Year dividend = 1.1 * 1.1 = 1.21

3rd Year dividend
`D_3 = 1.21 * 1.2 = 1.452`

Value at year 2
`= (D_3)/(required\ rate - growth\ rate)`

Value at year 2
`= (1.452)/(0.3 - 0.2)`

Value at year 2
`= (1.452)/(0.1)`

Value at year 2 = 14.52

Current price
`= (1.1)/((1 + 0.3)^1) + (1.21)/((1 + 0.3)^2) + (14.52)/((1 + 0.3)^2)`

Current price = $10.15