Final answer:
The current stock price for ICUC Enterprises is calculated by summing the present values of the dividends expected over the five-year period and beyond, at a constant growth rate thereafter. This involves using the Dividend Discount Model with adjustments for non-constant growth in the initial period.
Step-by-step explanation:
To calculate the current stock price of ICUC Enterprises, we need to find the present value of the dividend payments, taking into account the required return on the company’s common stock. The dividends for the first three years are $2.25 per share. After that, the dividends increase to $3.00 per share for the next two years. Lastly, dividends will grow at a constant rate of 5 percent per year.
We apply the Dividend Discount Model (DDM) to value the stock. The formula to calculate the present value of a dividend that grows at a constant rate (g) is Present Value of Dividend = Dividend per share / (Required Rate of Return - g). However, as the dividend growth is not constant over the first five years, we calculate the present value of each of these dividends separately and then apply the formula beginning from year 6 onwards considering the constant growth rate. The total present value of these dividends gives us the current stock price.
As the exercise provided as a reference uses a similar approach, the process would involve calculating the present value of each expected dividend, summing them up, and then dividing by the total number of shares to obtain the price per share. The reference example concludes with the share valuation of Babble, Inc., which is expected to be $256,500 per share.