Martha works for a prominent technology company. Her company just paid a $1.50 dividend per share. The required return for her company’s stock is 12%.
Question:
Consider the following information. Suppose Martha’s company is expected to increase dividends by 12% in one year, and by 8% in two years. After that, her company’s dividends will increase at a rate of 6% indefinitely. If the last dividend was $1.50 and the required rate of return in 12%, what is the current price of the stock?
D1=(1.5*1.12)=1.68
D2=(1.68*1.08)=1.8144
Value after year 2=(D2*Growth rate)/(Required return-Growth rate)
=(1.8144*1.06)/(0.12-0.06)
=32.0544
Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)
=1.68/1.12+1.8144/1.12^2+32.0544/1.12^2
=$28.5
Martha works for a prominent technology company. Her company just paid a $1.50 dividend per share....
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