The R Company\'s last dividend was $1.20. Its dividend growth rate is expected t

Question

The R Company's last dividend was $1.20. Its dividend growth rate is expected to be at 35% for 3 years, after which dividends are expected to grow at a constant rate of 5% forever. Its required return (rs) is 15%. What is the best estimate of the current stock price?


The R Company's last dividend was $1.20. Its dividend growth rate is expected to be at 35% for 3 years, after which dividends are expected to grow at a constant rate of 5% forever. Its required return (rs) is 15%. What is the best estimate of the current stock price?

Explanation / Answer

current stock price = 1.2*1.35/1.15 + 1.2*(1.35/1.15)^2 + 1.2*(1.35/1.15)^3 + 1.2*(1.35^3)*1.05*(1.15^-3)/(0.15-0.05) = $ 25.39

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