Question

Williamson Metals, Inc. paid a dividend last year of $3, and is expecting dividends to grow at an 18% rate in years 1 and 2 followed by constant growth of 6% per year thereafter. Similar stocks return 12%. Calculate the value of the stock today.

Select one:
a. $93.76
b. $73.85
c. $65.37
d. $82.91

Answer 1

The value of the stock today is $82.91.

Step-by-step explanation:

To calculate the value of the stock today, we can use the dividend discount model (DDM) which values a stock based on its future dividends.

1. First, we need to calculate the present value of the dividends expected in years 1 and 2. The dividends in year 1 would be $3 * (1 + 18%) = $3.54, and the dividends in year 2 would be $3.54 * (1 + 18%) = $4.18.
2. Next, we calculate the present value of the constant growth dividends using the formula: constant growth rate / (required return - constant growth rate).
3. Finally, we sum up the present values of all the future dividends to get the present value of the stock today. In this case, the value of the stock today would be $3.54 / (0.12 - 0.06) + $4.18 / (0.12 - 0.06) = $82.91.