CX Enterprises has the following expected dividends: $1 n one year, $1.30 in 2 years, and $1.50 in 3 years. After that its dividends are expected to grow at 2% per year forever (so that year 4's dividend will be 2% more than $1.50 and so on). If CX's equity cost of capital is 1596, what is the current price of its stock?
The current price of the stock is $______.
Homework Answers
Value after 3 years=(D3*Growth Rate)/(Cost of capital-Growth Rate)
=(1.5*1.02)/(0.15-0.02)
=$11.76923077
Hence current price=Future dividends*Present value of discounting factor(rate%,time period)
=1/1.15+1.3/1.15^2+1.5/1.15^3+$11.76923077/1.15^3
=$10.58(Approx).
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