Question

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Huang Company's last dividend was $1.20 (DO). The dividend growth rate is expected to be at 10% for the next 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?

$34.52

$31.52

$33.50

$28.29

$32.49

Answer 1

Answer is $28.29

Last Dividend, D0 = $1.20

Growth rate for next 3 years is 10% and a constant growth rate (g) of 6% thereafter

D1 = $1.20 * 1.10 = $1.32
D2 = $1.32 * 1.10 = $1.452
D3 = $1.452 * 1.10 = $1.5972
D4 = $1.5972 * 1.06 = $1.693032

Required Return, rs = 11%

P3 = D4 / (rs - g)
P3 = $1.693032 / (0.11 - 0.06)
P3 = $33.86064

P0 = $1.32/1.11 + $1.452/1.11^2 + $1.5972/1.11^3 + $33.86064/1.11^3
P0 = $28.29

So, the current stock price is $28.29