Question

A stock just paid a dividend of $1.48. The dividend is expected to grow at 26.12% for five years and then grow at 4.46% thereafter. The required return on the stock is 11.40%. What is the value of the stock?

Answer 1

The value of the stock can be calculated using the dividend growth model to discount future dividends at the required rate of return, considering different growth rates for an initial period and perpetuity.

Step-by-step explanation:

The question seeks to determine the value of a stock based on its future dividend payments and the required rate of return. To calculate the value of the stock, we use the dividend growth model, which accounts for the initial dividend payment, the periods of growth at different rates, and the required rate of return. This model is a common financial valuation method in the context of stock market investments. For this particular stock, with an initial dividend of $1.48, a growth rate of 26.12% for the first five years, and a perpetual growth rate of 4.46% thereafter, we must calculate the present value of all future dividends discounted at the required return of 11.40%. This involves using the two-stage dividend growth model. The two-stage dividend growth model breaks down future dividend payments into two parts. The first stage includes dividends that are expected to grow at an initial higher growth rate (26.12% in this case), and the second stage includes dividends growing at a lower, perpetual rate (4.46% in this case).