Question

Wildhorse Tire's current dividend is $5.00. Dividends are expected to grow by 25 percent for years 1 to 3 and 10 percent thereafter. The required rate of return on the stock is 13 percent. What is Wildhorse's current stock price? (Round intermediate calculations to 4 decimal places, e.g. 7.1285 and final answer to 2 decimal places, e.g. 115.61.)

Answer 1

The dividend for year 1 is $5.00 * 1.25 = $6.25.
The dividend for year 2 is $6.25 * 1.25 = $7.81.
The dividend for year 3 is $7.81 * 1.25 = $9.77.
The dividend for year 4 is $9.77 * 1.10 = $10.75.
The dividend for year 5 is $10.75 * 1.10 = $11.83.
The dividend for year 6 is $11.83 * 1.10 = $13.01.
The dividend for year 7 is $13.01 * 1.10 = $14.31.
The dividend for year 8 is $14.31 * 1.10 = $15.74.
The dividend for year 9 is $15.74 * 1.10 = $17.31.
The dividend for year 10 is $17.31 * 1.10 = $19.04.

The present value of the first 3 years of dividends is:
PV = $6.25 / (1 + 0.13)^1 + $7.81 / (1 + 0.13)^2 + $9.77 / (1 + 0.13)^3
PV = $14.68

The present value of the remaining dividends is:
PV = ($10.75 / (0.13 - 0.10)) / (1 + 0.13)^3 + ($19.04 / (0.13 - 0.10)) / (1 + 0.13)^3
PV = $186.92

The current stock price is the sum of the present value of the dividends:
P0 = PV of first 3 years of dividends + PV of remaining dividends
P0 = $14.68 + $186.92
P0 = $201.60

Therefore, the current stock price of Wildhorse Tire is $201.60.