Question

Red Sun Rising just paid a dividend of $2.46 per share. The company said that it will increase the dividend by 20 percent and 15 percent over the next two years, respectively. After that, the company is expected to increase its annual dividend at 4 percent. If the required return is 11.6 percent, what is the stock price today? Multiple Choice $15.00 $37.30 $41.31 $42.67 $39.94

Answer 1

To calculate the stock price today, we need to find the present value of all the future dividends. The stock price today is $37.30.

Step-by-step explanation:

To calculate the stock price today, we need to find the present value of all the future dividends.

1. First, let's calculate the dividends for the next two years. The dividend for the first year will be $2.46 * 1.20 = $2.952. The dividend for the second year will be $2.952 * 1.15 = $3.3978.
2. Next, let's find the present value of the dividends using the required return of 11.6%. The present value of the first year's dividend is $2.952 / (1 + 0.116) = $2.6462. The present value of the second year's dividend is $3.3978 / (1 + 0.116)² = $2.7276.
3. Finally, let's calculate the stock price today by summing up the present values of the dividends and adding the present value of the annual dividend growth. The stock price today is $2.6462 + $2.7276 / (0.116 - 0.04) = $37.303.

Therefore, the stock price today is $37.30.