Question

A stock currently pays no dividends. However, you believe it will pay it first dividend of $3.12 exactly 4 years from now. Future dividends will grow at a constant 3.7% every year thereafter. If the stock's required rate of return is 14.0%, what is a fair price for the stock today? Round your answer to the nearest penny.

Answer 1

The fair price for the stock today is $30.29.

Step-by-step explanation:

To determine the fair price of the stock today, we need to calculate the present value of the future dividends. The formula to calculate the present value of a growing dividend stream is:

PV = D1 / (r - g)

Where PV is the present value, D1 is the first dividend, r is the required rate of return, and g is the growth rate of dividends. In this case, D1 is $3.12, r is 14.0%, and g is 3.7%. Plugging these values into the formula, we get:

PV = $3.12 / (0.14 - 0.037) = $3.12 / 0.103 = $30.29

Therefore, the fair price for the stock today is $30.29.