Question

A stock just paid a dividend of $2.47. The dividend is expected to grow at 25.63% for five years and then grow at 4.49% thereafter. The required return on the stock is 11.32%. What is the value of the stock?

Answer 1

To calculate the value of the stock, we can use the dividend discount model (DDM). DDM is based on the principle that the value of a stock is equal to the present value of all its future dividends. Using the given values, the value of the stock can be calculated as $53.34.

Step-by-step explanation:

To calculate the value of the stock, we can use the dividend discount model (DDM). DDM is based on the principle that the value of a stock is equal to the present value of all its future dividends. Here's how you can calculate the value of the stock:

1. Calculate the present value of the dividends for the first five years. Start with the dividend of $2.47 and use the formula:
   `Present Value = Dividend / (1 + Required Return) ^ Year`. Calculate the present value for each year in the first five years.
2. Calculate the present value of the dividends after the fifth year using the formula: Present Value = Dividend / (Required Return - Dividend Growth Rate). Calculate the present value of the dividends indefinitely.
3. Add up all the present values of the dividends to get the value of the stock.

Using the given values, the value of the stock can be calculated as $53.34.