Question

chiptech, inc. paid a $3 dividend last year and is expected to grow the dividend at 10% for the next 2 years. the dividend will then grow at a constant rate of 4%, thereafter. if investors require a return of 12% on this stock, what is chiptech's current price?

Answer 1

We can use the dividend discount model to calculate the current price of Chiptech's stock:

P = D / (r - g)

where P is the current price of the stock, D is the dividend, r is the required rate of return, and g is the dividend growth rate.

In this case, the dividends for the next 2 years will be:

D1 = D0 (1 + g) = $3 * 1.10 = $3.30
D2 = D1 (1 + g) = $3.30 * 1.10 = $3.63

After the second year, the dividend will grow at a constant rate of 4%, so:

g = 0.04

The required rate of return is given as:

r = 0.12

Now we can calculate the current price of the stock:

P = ($3.00 + $3.30 + $3.63) / (0.12 - 0.10) + $3.63 / (0.12 - 0.04) / (1 + 0.12)^2
= $9.93 + $88.69
= $98.62

Therefore, the current price of Chiptech's stock is $98.62.