Question

A stock just paid a dividend of $1.64. The dividend is expected to grow at 24.93% for five years and then grow at 4.70% thereafter. The required return on the stock is 11.34%. What is the value of the stock?

Answer 1

The value of the stock is $14.70.

Step-by-step explanation:

To calculate the value of a stock, we can use the Gordon Growth Model, which is V = D1 / (k - g), where V is the value of the stock, D1 is the dividend expected in the first year, k is the required return, and g is the growth rate.

Using the given information, the dividend expected in the first year is $1.64, the required return is 11.34%, and the growth rate is 24.93% for the first five years, and 4.70% thereafter.

Substituting these values into the formula, we get V = $1.64 / (0.1134 - 0.2493) + ($1.64 * 1.2493) / (0.1134 - 0.0470) = $14.70.