Question

6. Hope corporation paid a dividend of $2.00 (D0) last year. The growth rate is expected to be 20 percent and 10 percent during the next two years, and then the growth rate is expected to be a constant 5 percent thereafter. The required rate of return on equity (rS) is 10 percent. What is the current stock price (P0)

Answer 1

Current stock price = $46.02

Step-by-step explanation:

Dividend just paid (D0) = $2

D1 = D0 * (1 + g) = $2 * (1.20) = $2.40

D2 = D1 *(1 + g) = $2.40 * (1.10) = $2.64

Terminal value = $2.64 * 1.05 / (0.10 - 0.05)

Terminal value = $55.44

Current stock price = Present value of cash flows

Current stock price = [$2.40 / (1.10)1] + [$2.64 / (1.10)2] + [$55.44 / (1.10)3]

Current stock price = $46.02