A company currently (t = 0) pays a dividend of $2.50 per share on its common sto

Question

A company currently (t = 0) pays a dividend of $2.50 per share on its common stock. Dividends are expected to increase at the rate of $.25 per share for the next several years. Determine the current value of this firm

A company currently (t = 0) pays a dividend of $2.50 per share on its common stock. Dividends are expected to increase at the rate of $.25 per share for the next several years. Determine the current value of this firm's common stock to an investor who expects to be able to sell the stock for $35 per share after 3 years, given that the investor requires a 14 percent rate of return on this security.

Explanation / Answer

Given the Divendend Discount Model, the answer would be d.$68.75

Share Price= DIV1/(Req Return-Growth)

Growth=.25/2.5=10%

so Share Price= 2.75/(.14-.10)

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