Question

Huang Company's last dividend was $1.25. The dividend growth rate is expected to be constant at 27.5% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price

Answer 1

Price of stock today = $53.29

Step-by-step explanation

The Dividend Valuation Model(DVM) is a technique used to value the worth of an asset. According to this model, the value of an asset is the sum of the present values of the future cash flows would that arise from the asset discounted at the required rate of return.

This model would be applied as follows:

PV from year 1 to 3

Year Present Value ( PV)

1 1.25 × 1.275 × 1.1^(-1) = 1.4358

2 1.25 × 1.275^2 × 1.1^(-2) = 1.6492

3 1.25 × 1.275^3 × 1.1^(-3) = 1.894

Total 4.979

Year 4 and beyond

This will be done in two steps

Step 1

D× (1+g)/k-g

1.25 ×1.275^4/(0.11-0.06)

=66.066

Step 2

Present Value in year 0

=66.066 × 1.11^(-3) = 48.3068

Total present value = 4.979 + 48.306= 53.286

Price of stock today = $53.29