Question

ABC,. Inc just paid a dividend of $37.02. The dividends are expected to grow by 24% in Years 1-4. After that, the dividends are expected to grow by 2% each year. If the required rate of return is 20%, what is today's price of the stock?

Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box.

Answer 1

ABC just paid a dividend of $37.02, the dividend are expected to grow by 24% from 1 - 4 year After that dividends will grow at 2% each year Required rate of return = 20% 1 45.90 2 5 6.92 3 70.58 5 89.27 Dividends 87.52 To calculate the value of the stock, we will calculate the present value of dividends as well as the terminal value 45.9/(1.2)^1 +56.92/(1.2)^2 +70.58/(1.2)^3 +87.52/(1.2)^4 +89.27/((0.2-0.02)*(1.2)^4) 400.00