Question

Ackert Company's last dividend was $4.75. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price? Do not round intermediate calculations.

Answer 1

calculate the dividend in one year (D1) and two years (D2):

growth rate = (1+r) = 1 + 1.5% = 1 + .015 = 1.015

dividend times growth rate = D1

D1 times growth rate = D2

$4.75 x 1.015 = $4.82 = D1

$4.82 x 1.015 = $4.90 = D2

calculate the present value of the dividends for the first two years (PV1) and the present value of the dividends from year 3 onward (PV2):

PV1 = $4.82 / (1 + 0.120) + $4.90 / (1 + 0.120)^2

PV2 = $4.90 x (1.080 / (1.120 - 0.080)) / (1 + 0.120)^2

Finally, we add PV1 and PV2 to get the estimated current stock price:

Stock Price = PV1 + PV2

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