A stock just paid annual dividends of $3.93 per share. The dividends are expected to grow...
A stock just paid annual dividends of $3.93 per share. The dividends are expected to grow at 15 per cent per year for 3 years, and then remain constant in perpetuity. If the investors' required return for the stock is 14 percent, what should be the price of the stock today? A. $33 B. $43 C. $37 D. $47
Homework Answers
value of stock = Present value of dividends + Horizontal value
Horizontal value = dividend next year/(Required return - growth rate)
=>
horizontal value = 3.93 * 1.15^3/0.14
= 42.6931339286
value of stock = 3.93*1.15/1.14 + 3.93*1.15^2/1.14^2 + 3.93*1.15^3/1.14^3 + 42.6931339286/1.14^3
= 40.82
closest choice is B) 43
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