Question

A stock just paid a dividend of $2.02. The dividend is expected to grow at 20.57% for two years and then grow at 3.36% thereafter. The required return on the stock is 13.57%. What is the value of the stock?

Answer 1

The value of the stock is $11.43.

Step-by-step explanation:

To calculate the value of the stock, we can use the dividend discount model (DDM). The DDM formula is: Value of Stock = Dividend / (Required Return - Dividend Growth Rate). Applying this formula:

Dividend = $2.02

Dividend Growth Rate = 20.57% for two years + 3.36% thereafter

Required Return = 13.57%

Using these values, we can calculate the value of the stock:

Value of Stock = $2.02 / (0.1357 - 0.2057) + ($2.02 * 1.0336) / (0.1357 - 0.0336) = $11.43