A7X Corp. just paid a dividend of $2.60 per share. The dividends are expected to

Question

A7X Corp. just paid a dividend of $2.60 per share. The dividends are expected to grow at 18 percent for the next eight years and then level off to a growth rate of 7 percent indefinitely. If the required return is 13 percent, what is the price of the stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

A7X Corp. just paid a dividend of $2.60 per share. The dividends are expected to grow at 18 percent for the next eight years and then level off to a growth rate of 7 percent indefinitely. If the required return is 13 percent, what is the price of the stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Answer:

As per Dividend Discount growth Model:

Stock Price = Present value of expected dividend of next eight years + PV of Exprected dividend of 9th year/(Required return - Growth rate at 9th year)

So Present value of expected dividend of next eight years:

PV of terminal value = {Exprected dividend of 9th year/(Required return - Growth rate at 9th year)}/(1+0.13)8

                             = {$9.77(1+0.07)/(0.13-0.07)}/(1+0.13)8 = $174.23/2.6584 = $65.54

So the Stock price = $25.399+$65.54 = $90.94 (ans)

Year Dividends($) Discount rate @13% Discounted Dividends 1 3.07 0.8850 2.715 2 3.62 0.7831 2.835 3 4.27 0.6931 2.961 4 5.04 0.6133 3.092 5 5.95 0.5428 3.228 6 7.02 0.4803 3.371 7 8.28 0.4251 3.520 8 9.77 0.3762 3.676 PV of 8 years dividend = $ 25.399

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