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An analyst forecasts dividends over the next three years for ABC Company of $1.25, $2.00, and $2.50 respectively. He also expects that the dividend will grow at a constant rate of 3% forever after the
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44 votes
44 votes
An analyst forecasts dividends over the next three years for ABC Company of $1.25, $2.00, and $2.50 respectively. He also expects that the dividend will grow at a constant rate of 3% forever after the third year. If the required rate of return is 12%, ABC stock price is closest to:

User Joel Harris
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1 Answer

15 votes
15 votes

Answer:

$24.85

Step-by-step explanation:

The stock price of the abc is given below:

Value of Stock after Year 3 = (Forecasted Dividend for Year 3 × Growth Rate) ÷ (Required Rate of Return - Growth Rate of Dividend)

= (2.5 × 1.03) ÷ (0.12-0.03)

= 28.61

Now

Current Stock Price = PV of all Future Dividends and Present Value of Stock after Year 3

=(1.25 ÷ 1.12) + (2 ÷ 1.12^2) + (2.5 ÷ 1.12^3) + (28.61 ÷ 1.12^3)

= 1.1161 + 1.5944 + 1.7795 + 20.3640

= $24.85

User Etella
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