Question

Doc Brown, Inc. just paid a dividend of D0 = $1.21. Analysts expect the company's dividend to grow by 24% this year, by 20% in Year 2, and at a constant rate of 7.2% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock’s current market value?

Answer 1

The correct answer is $93.14.

Step-by-step explanation:

According to the scenario, the given data are as follows:

D0 = $1.21

Dividend 1st year = $1.21 × 1.24

Dividend 2nd year = $1.21 × 1.24 × 1.20

Dividend 3rd year = $1.21 × 1.24 × 1.20 × 1.072

So, we can calculate the stock's current market value by using following formula:

Stock current market value = $1.21(1.24) ÷ (1.09) + $1.21(1.24)(1.20) ÷ (1.09)2 + 1.21(1.24)(1.20)(1.072) ÷ (0.09 - 0.072)(1.09)2

= $1.38 + $1.51 + $90.25

Stock Current market Price = $93.14