Question

The last dividend paid by Wilden Corporation was $3.75. 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?

Select the correct answer.
a. $90.43
b. $91.23
c. $92.83
d. $92.03
e. $89.63

Answer 1

The best estimate of the current stock price is $2440.521, which is not listed in the given answer choices.

Step-by-step explanation:

To estimate the current stock price, we can use the Gordon Growth Model (also known as the Dividend Discount Model). The formula is P = D / (rs - g), where P is the stock price, D is the dividend, rs is the required return, and g is the dividend growth rate.

First, we need to determine the dividend at year 2. The dividend growth rate is expected to be constant at 1.5% for 2 years, so we can calculate it as follows: D2 = D1 * (1 + g)^2. Plugging in the numbers, D2 = 3.75 * (1 + 0.015)^2 = 3.75 * 1.030225 = 3.87084.

Next, we calculate the stock price using the formula: P = 3.75 / (0.12 - 0.08) + 3.87084 / (0.12 - 0.08) = 93.75 / 0.04 + 3.87084 / 0.04 = 2343.75 + 96.771 = 2440.521.

Therefore, the best estimate of the current stock price is $2440.521, which is not listed in the given answer choices.