Question

A7x corp. just paid a dividend of $1.50 per share. the dividends are expected to grow at 35 percent for the next 8 years and then level off to a growth rate of 9 percent indefinitely. if the required return is 13 percent, what is the price of the stock today?

Answer 1

To calculate the price of the stock today, we need to calculate the present value of the expected dividends and the terminal value of the stock. The dividends are expected to grow at 35% for the first 8 years and then level off to a growth rate of 9% indefinitely. The required return is 13%.

Step-by-step explanation:

To calculate the price of the stock today, we need to calculate the present value of the expected dividends and the terminal value of the stock. The dividends are expected to grow at 35% for the first 8 years and then level off to a growth rate of 9% indefinitely. The required return is 13%. Here's how to calculate the price:

1. Calculate the present value of the expected dividends for the first 8 years: $1.50 * (1 + 35%) / (13% - 35%) = $12.84
2. Calculate the terminal value of the stock using the expected dividend at year 9: $1.50 * (1 + 35%) * (1 + 9%) / (13% - 9%) = $23.14
3. Discount the terminal value and the present value of the dividends to the present day: $23.14 / (1 + 13%)^9 + $12.84 / (1 + 13%)^8 = $13.00

Therefore, the price of the stock today is $13.00.