Question

Goodell Corporation just paid its annual dividend of $1.75, today. Dividends for the Goodell Corporation are expected to increase by 27.5 percent in year one and 13.8 percent in year 2. After year two, dividends are expected to increase at a rate of 5 percent per year.

What is the current price of Goodell Corporation’s stock? Assume the required rate of return is 10 percent.

Answer 1

current price of Goodell Corporation stock is $48.26

Step-by-step explanation:

given data

annual dividend = $1.75

expected to increase 1 year = 27.5 percent

expected to increase 2 year = 13.8 percent

expected to increase per year = 5 percent

required rate of return = 10 percent

solution

we get here first dividend that is

D1 = 1.75 × (1.275) = 2.23 ...............1

D2 = 2.23 × (1.138) = 2.54 ...............2

D3 = 2.54 × (1.05) = 2.67 ...............3

and

year 2 price will be

P2 = D3 ÷ (R – g) ...............4

P2 = 2.67 ÷ (0.10 - 0.05)

P2 = 53.4 ...............5

so current price will be

P = 2.23 ÷ (1.10) + 2.54 ÷ (1.10)2 + 53.40 ÷ (1.10)2

P = $48.26