Final answer:
To calculate the stock price of Navel County Choppers Inc., one should use the dividend growth model to discount the projected dividends at the required rate of return and consider both the high-growth phase and the perpetual growth thereafter.
Step-by-step explanation:
Calculating the Stock Price of Navel County Choppers Inc.
To determine the stock price of Navel County Choppers Inc., we need to consider the dividend growth model, given that the company expects dividends to grow at 23 percent for the next 9 years before stabilizing at a perpetual growth rate of 5 percent. The required return on the company’s stock is 14 percent, and the dividend per share just paid was $1.72. The calculation involves finding the present value of the dividends during the high-growth phase and the present value of the dividends in perpetuity from the tenth year onwards, and then summing these values to find the current stock price.
Without going into the detailed calculations, which would involve using the Gordon Growth Model for the terminal value and discounting the dividends at the required rate of return, the key point is to understand that a stock’s price reflects the present value of all expected future dividends, adjusted for risk and time preference. An investor considering whether to purchase a share will weigh these numbers to decide the maximum price they are willing to pay.