Question

A company will pay a $2 per share dividend in 1 year. The dividend in 2 years will be $4 per share, and it is expected that dividends will grow at 2% per year thereafter. The expected rate of return on the stock is 10%. a. What is the current price of the stock?

Answer 1

$43.441

Step-by-step explanation:

Data provided in the question:

Dividend paid in year 1, D0 = $2 per share

Dividend paid in year 2, D1 = $4 per share

Growth rate, g = 2%

Required return on stock, r = 10%

Now,

D3 = [ D2(1 + g) ] ÷ [ r - g ]

= [ $4(1 + 0.02) ] ÷ [ 0.10 - 0.02 ]

= $51

Thus,

The current price of the stock

=
`(\$2)/((1+0.10)^1)+(\$4)/((1+0.10)^2)+($51)/((1+0.10)^3)`

= 1.818 + 3.306 + 38.317

= $43.441