Question

Miller Juice, Inc. is not paying a dividend right now, but is expected to pay a $4.56 dividend three years from now. Investors expect that dividend to grow by 4% every year forever. If the required return on the stock investment is 14%, what should be the price of Miller Juice stock today

Answer 1

$35.09

Step-by-step explanation:

according to the constant dividend growth model

price = d1 / (r - g)

d1 = next dividend to be paid

r = cost of equity

g = growth rate

4.56 x (1.04) / (0.14 - 0.04) = $47.42

($47.42 + 4.56) / 1.14^3 = $35.09