Question

The Border Crossing just paid an annual dividend of $4.20 per share and is expected to pay annual dividends of $4.40 and $4.50 per share the next two years, respectively. After that, the firm expects to maintain a constant dividend growth rate of 2 percent per year. What is the value of this stock today if the required return is 14 percent?

A. $30.04
B. $32.18
C. $33.33
D. $35.80
E. $36.75.

Answer 1

option (E) $36.75

Step-by-step explanation:

Given:

Dividend growth rate, g = 2% = 0.02

Required return, r = 14% = 0.14

Now,

The value of the stock

= Present value of ( Dividend of 4.40 to be received next year + Dividend of 4.50 to be received the year after the next year + Value of the share as at the beginning of the third year )

Thus,

The price of the share

=
`(4.40)/((1+g)^1)` +
`(4.50)/((1+g)^2) +((4.50*(1+g))/((r-g)))/((1+r)^2)`

=
`(4.40)/((1+0.02)^1)` +
`(4.50)/((1+0.02)^2)` +
`((4.50*(1+0.02))/((0.14-0.02)))/((1+0.02)^2)`

= 3.86 + 3.46 + 29.43

= $36.75

Hence,

the correct answer is option (E) $36.75