Question

Brickhouse is expected to pay a dividend of $2.90 and $2.36 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.4 percent. What is the stock price today if the required return is 10.8 percent?

Answer 1

$31.40

Step-by-step explanation:

Value of stock is the sum of present value of all the dividends associated with stock in future.

We will use the following formula to calculate the present values of dividends

Present Values = P x ( 1 + r )^-n

First year = $2.90 x ( 1 + 10.8% )^-1 = $2.62

Second year = $2.36 x ( 1 + 10.8% )^-2 = $1.92

First we need to calculate the value of stock at year 2 and discount it to year 0.

After second year = [ $2.36 x ( 1 + 3.4% ) / ( 10.8% - 3.4% ) ] x ( 1 + 10.8% )^-2 =$26.86

Now add all the present values of dividend below to determine the value of stock.

Value of stock = $2.62 + $1.92 + $26.86 = $31.40