Final answer:
The estimated current market value of Greshak Corp's stock, given the dividend growth rates and the required return, is approximately $39.49 per share. This value is calculated by finding the present value of expected future dividends, accounting for different growth rates in the first two years and a constant growth rate thereafter.
Step-by-step explanation:
The current market value of Greshak Corp.'s stock can be estimated using the dividend growth model, which considers the expected growth rates and the required return. The calculation takes into account the next two years of dividends, which are expected to grow at specified rates, and then the stock is assumed to pay dividends at a constant growth rate from Year 3 onwards. The calculations involve discounting these future dividends to their present value using the required return rate.
First, calculate the expected dividends:
- Year 1: $2.50 × (1 + 0.20) = $3.00
- Year 2: $3.00 × (1 + 0.10) = $3.30
- Year 3 and onwards: $3.30 × (1 + 0.04) = $3.432, which then grows at 4% per year indefinitely.
Then, these dividends must be discounted back to their present value using the 14.0% required return:
- PV of Year 1 Dividend: $3.00 / (1 + 0.14) = $2.63
- PV of Year 2 Dividend: $3.30 / (1 + 0.14)^2 = $2.54
- PV of Year 3 and onwards dividends (using the Gordon growth model): $3.432 / (0.14 - 0.04) = $34.32
Finally, add these present values together to estimate the current market value of the stock.
Estimated market value of Greshak Corp.'s stock = $2.63 + $2.54 + $34.32 = $39.49