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Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2.00, a dividend...

Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2.00, a dividend in year 2 of $3.00, and a dividend in year 3 of $4.00. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today.

            A) $63.80

            B) $65.13

            C) $67.95

            D) $85.60

My professor has the answer as C: 67.95, but I am getting D: 85.6

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Answer #1

value of stock = Present value of dividends + Horizontal value

Horizontal value = dividend next year/(Required return - growth rate)

=>

horizontal value = 4 * 1.07/(0.12-0.07)

= 85.6

value of stock = 2/1.12 + 3/1.12^2 + 4/1.12^3 + 85.6/1.12^3

= 67.95

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