Question

Blossom Corp. will pay dividends of $5.00, $6.25, $4.75, and $3.00 in the next four years. Thereafter, management expects the dividend growth rate to be constant at 7 percent. If the required rate of return is 15.50 percent, what is the current value of the stock?

Answer 1

Present value = $35.00326585 rounded off to $35.00

Step-by-step explanation:

Using the dividend discount model, we calculate the price of the stock today. It values the stock based on the present value of the expected future dividends from the stock. To calculate the present value of the stock, we will use the following formula,

Present value = D1 / (1+r) + D2 / (1+r)^2 + ... + Dn / (1+r)^n +

[(Dn * (1+g) / (r - g)) / (1+r)^n]

Where,

• r is the required rate of return

• g is the constant growth rate in dividends
• n is the number of years

Present value = 5 / (1+0.155) + 6.25 / (1+0.155)^2 + 4.75 / (1+0.155)^3 +

3 / (1+0.155)^4 + [(3 * (1+0.07) / (0.155 - 0.07)) / (1+0.155)^4]

Present value = $35.00326585 rounded off to $35.00