Question

The last dividend paid by Wilden Corporation was $3.50. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price? Select the correct answer. a. $87.92 b. $83.66 c. $82.24 d. $85.08 e. $86.50

Answer 1

b. $83.66

Step-by-step explanation:

The computation of the best estimated price of the current stock price is shown below:

But before that following calculations need to be done

Dividend at year 0 = $3.50

Dividend at year 1 = $3.50 × 1.015 = $3.5525

Dividend at year 2 = $3.5525 × 1.015 = $3.6058

Dividend at year 3 = $3.6058 × 1.08 = $3.8943

Now price at year 2 is

= $3.8943 ÷ (12% - 8%)

= $97.3563

Now the current stock price is

= $3.5525 ÷ (1.12) + ($3.6058 + $97.3563)÷ (1.12)^2

= $3.1719 + $8.4863

= $83.66