Question

A stock is expected to pay a dividend of $3 next year. The dividend will grow at a rate of 5% for 2 years, and will then grow at a rate of 2% from that point on. If the required rate of return is 6%, what is the stock’s value today?

Answer 1

The pric eof the stock today us $77.12

Step-by-step explanation:

The two stage dividend growth model of DDM will be used to calculate the price of the stock today. The formula for two stage growth model is:

Price today = D1 / (1+r) + D2 / (1+r)^2 + ... + [(Dn / r - g) / (1+r)^n]

Price today = 3 / (1+0.06) + + 3 * (1+0.05) / (1+0.06)^2 + [(3 * (1+0.05) * (1+0.02) / 0.06 - 0.02) / (1+0.06)^2]

Price today = $77.12