Question

Growing, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid a dividend of $3.40. You believe that dividends will grow at a rate of 19.0% per year for two years, and then at a rate of 7.0% per year thereafter. You expect the stock will sell for $17.17 in two years. You expect an annual rate of return of 22.0% on this investment. If you plan to hold the stock indefinitely, what is the most you would pay for the stock now

Answer 1

$18.09

Step-by-step explanation:

The computation of the current stock price is shown below:

Particulars Dividend or amount PVIF at 22% Present value

D1 $4.05 0.820 $3.32

($3.40 × 1.19)

D2 $4.81 0.672 $3.23

($4.05 × 1.19)

Stock price in 2 years $17.17 0.672 $11.54

Current stock price $18.09