Question

A stock just paid a dividend of $2.73. The dividend is expected to grow at 22.11% for three years and then grow at 4.42% thereafter. The required return on the stock is 12.16%. What is the value of the stock?

Answer 1

The value of the stock is $43.08.

Step-by-step explanation:

To calculate the value of the stock, we need to use the dividend discount model (DDM). The DDM formula is:

Value of Stock = D1 / (r - g)

Where:

D1 is the dividend expected at the end of year 1

g is the growth rate of the dividend

In this case, the dividend expected at the end of year 1 is $2.73 * (1 + 0.2211) = $3.34. Plugging in the values, we have:

Value of Stock = $3.34 / (0.1216 - 0.0442)

Value of Stock = $3.34 / 0.0774 = $43.08

Therefore, the value of the stock is $43.08.