Question

Milo's Fashions recently paid a $2 annual dividend. The company is projecting that its dividends will grow by 20 percent next year, 12 percent annually for the two years after that, and then at 6 percent annually thereafter. Based on this information, how much should Milo's Fashions common stock sell for today if her required return is 10.5%

Answer 1

Today the stock should sell for $59.16

Step-by-step explanation:

The three stage growth model of Dividend discount model approach will be used to calculate the price of this stock today. The DDM bases the value of the stock today based on the present value of the expected future dividends that the stock will pay. The price per share today of this stock under the DDM model will be,

P0 = 2 * (1+0.2) / (1+0.105) + 2 * (1+0.2) * (1+0.12) / (1+0.105)^2 +

2*(1+0.2)*(1+0.12)^2 / (1+0.105)^3 +

[(2 * (1+0.2) * (1+0.12)^2 * (1+0.06) / (0.105-0.06)) / (1+0.105)^3 ]

P0 = $59.16