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DBP Inc. just paid a dividend of $1.10. The expected growth rate of dividend is 8...

DBP Inc. just paid a dividend of $1.10. The expected growth rate of dividend is 8 percent. The required return for investors in the first three years is 20 percent and 15 percent for the following three years. After those six years, the required return is 10 percent. What is the current share price of the stock?

A. $40.67

B. $36.98

C. $41.77

D. $39.12

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Answer #1

ANSWERT

Correct answer is Option (A)=$40.67

Current share price of the stock = D1/1.20 + D2/1.20^2 + D3/1.20^3 + D4/(1.20^3 *1.15)+ D5/(1.20^3 *1.15^2)+ D6/(1.20^3 *1.15^3) + (D7/(Re-g))/(1.20^3 *1.15^3)

Current share price of the stock =  1.10*1.08/1.20 + 1.10*1.08^2/1.20^2 + 1.10*1.08^3/1.20^3 +1.10*1.08^4/(1.20^3 *1.15)+ 1.10*1.08^5/(1.20^3 *1.15^2)+ 1.10*1.08^6/(1.20^3 *1.15^3) +(1.10*1.08^7/(10%-8%))/(1.20^3 *1.15^3)

Current share price of the stock = $ 40.67

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