Question

Navel County Choppers, Inc., is experiencing rapid growth. The company expects dividends to grow at 20 percent per year for the next 9 years before leveling off at 5 percent into perpetuity. The required return on the company’s stock is 13 percent. If the dividend per share just paid was $1.74, what is the stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

We can use the two-stage dividend growth model for this problem, which is:

P₀ = [D₀(1 + g₁) / (R − g₁)]{1 − [(1 + g₁) / (1 + R)]^t} + [(1 + g₁) / (1 + R)]^t[D₀(1 + g₂) / (R − g₂)]

P₀ = [$1.74(1.20) / (.13 − .20)][1 − (1.20 / 1.13)⁹] + [(1.20) / (1.13)]⁹[$1.74(1.05) / (.13 − .05)]

P₀ = $60.63