Question

Whackamole corporation's share is trading in the open market. The company is expected to pay S5 dividend next year, but the dividend is expected to grow at 63 for another 4 years, but then decrease by 3% for another 5 years because of foresecable financial difficulties. But after that, the dividend is expected to grow again at 2%, which is roughly the expected GDP growth rate at US. Price this stock. Clearly show your calculations and forinulas

Answer 1

Price=Present value of dividends

here, cost of equity or required return is not given..Assuming it to be r

We see that the price of the stock is given as equal to

=5/(1+r)+5/(1+r)*(1.06/(1+r))+5/(1+r)*(1.06/(1+r))^2+5/(1+r)*(1.06/(1+r))^3+5/(1+r)*(1.06/(1+r))^4+5/(1+r)*(1.06/(1+r))^4*(0.97/(1+r))+5/(1+r)*(1.06/(1+r))^4*(0.97/(1+r))^2+5/(1+r)*(1.06/(1+r))^4*(0.97/(1+r))^3+5/(1+r)*(1.06/(1+r))^4*(0.97/(1+r))^4+5/(1+r)*(1.06/(1+r))^4*(0.97/(1+r))^5+5/(1+r)*(1.06/(1+r))^4*(0.97/(1+r))^5*1.02/(r-2%)