Question

Your company is estimated to make dividends payments of $2.2 next year, $3.8 the year after, and $4.8 in the year after that. The dividends will then grow at a constant rate of 6% per year. If the discount rate is 13% then what is the current stock price

Answer 1

Answer: $58.62

Step-by-step explanation:

Current stock price = Present value of dividends + Present value of stock with constant dividend

Present value of stock with constant dividend = (Dividend in year 3 * (1 + Growth rate)) / (Discount rate - Growth rate)

= (4.8 * (1 + 6%)) / (13% - 6%)

= $72.6857142857

Current Stock Price = (2.2 / (1 + 13%)) +(3.8 / (1 + 13%)^2) + (4.8 / (1 + 13%)^3) + (72.6857142857/(1 + 13%) ^ 3)

= $58.62