Question

is expected to pay a dividend of $2.60 and $2.24 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 2.8 percent. What is the stock price today if the required return is 10.2 percent?

Answer 1

Answer: The stock prices for today are $35.14 and $30.27

Step-by-step explanation:

Stock Price(P) = D1/{r-g}

D1 = $2.6

D2 = $2.24

r = 10.2%

g = 2.8%

P1 = 2.6/(0.102 - 0.028)

P1 = 2.6/0.074

P1 = $35.14

P2 = 2.24/(0.102 - 0.028)

P2 = 2.24/0.074

P2 = $30.27

Answer 2

$29.13

Step-by-step explanation:

first we need to calculate the growing perpetuity value for year 2:

= dividend / (discount rte - growth rate) = $2.24 / (10.2% - 2.8%) = $2.24 / 7.4% = $30.27

Now we have to calculate the present value of the dividends for the next two years and the growing perpetuity:

present value = ($2.60 / 1.102) + ($2.24 / 1.102²) + ($30.27 / 1.102²) = $2.36 + $1.84 + $24.93 = $29.13