Question

Sheridan 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 16.00 percent, what is the current value of the stock? (Round all intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)

Answer 1

The current value of the stock is $33.35

Step-by-step explanation:

The computation of the current value of the stock is shown below:

Particulars Dividends PVIF at 16% Present value

Dividend 1 $5 0.862 $4.31

Dividend 2 $6.25 0.743 $4.64

Dividend 3 $4.75 0.641 $3.04

Dividend 4 $3 0.552 $1.66

Dividend 5 $3.21

($3 × 1.07)

Price of the

stock in 4 years $35.67 0.552 $19.70

($3.21 ÷ (16% - 7%))

Current value

of the stock $33.35