Question

Ever After Incorporated has common stock that is expected to grow at a rate of 15% over the next year. After this first year, it will stabilize to a 2% long-term growth rate. If the dividend just paid (D0) was $2.33 and the required rate of return on the stock is 6%, what is the value of the stock today (to 2 decimals)?

Answer 1

$66.99

Step-by-step explanation:

The computation of value of the stock is shown below:-

= Dividend in year 1 ÷ (1 + required rate of return) + 1 ÷ (1 + required rate of return) × ((Dividend in year 1 × (1 + growth rate) ÷ (required rate of return - growth rate))

= ($2.33 × 1.15) ÷ 1.06 + 1 ÷ 1.06 × (($2.33 × 1.15 × 1.02) ÷ (0.06 - 0.02))

= $2.6795 ÷ 1.06 + 1 ÷ 1.06 × ($2.73309 ÷ 0.04)

= $2.527830189 + 0.943396226 × $68.32725

= $2.527830189 + 64.45966981

= $66.9875

or $66.99

Therefore for computing the value of stock we simply applied the above formula.