Final answer:
The stock price next year for Spooner Corporation is estimated by calculating future dividends based on projected growth rates, discounting them at the required rate of return, and including the terminal value to account for the stabilization of growth at 3%.
Step-by-step explanation:
To calculate the stock price for the next year, we use the dividend discount model (DDM) accounting for the expected growth rates before reaching the stable growth phase. The dividends for the next four years are projected based on the initial dividend and growth rates given: D1 = $6 × (1 + 0.25), D2 = $6 × (1 + 0.25) × (1 + 0.20), D3 = $6 × (1 + 0.25) × (1 + 0.20) × (1 + 0.10), and D4 = $6 × (1 + 0.25) × (1 + 0.20) × (1 + 0.10) × (1 + 0.03).
We then calculate the terminal value (TV) at the end of year 4 using the formula TV = (D4 × (1+g)) / (r - g), where g is the stable growth rate of 3%, and r is the required rate of return of 10%. We discount all dividends received in years 1, 2, and 3, and add the discounted terminal value which represents all future cash flows from dividends growing at the stable rate post-year 4, using the formula P = D1 / (1+r)^1 + D2 / (1+r)^2 + D3 / (1+r)^3 + (TV / (1+r)^4). Using these calculations, we can arrive at an estimated stock price for the next year.
The stock price next year is determined using the dividend growth model considering the variable growth for the first three years and then transitioning to a stable growth rate, all discounted at the required rate of return.