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26 February, 00:54

A7X Corp. just paid a dividend of $2.10 per share. The dividends are expected to grow at 24 percent for the next eight years and then level off to a growth rate of 6 percent indefinitely. If the required return is 13 percent, what is the price of the stock today

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  1. 26 February, 04:08
    0
    Price of stock = $46.26

    Explanation:

    Dividend in year 1 = 1.24 * 2.10 = 2.604

    Year PV of Dividend

    1 to 8 2.604 / (0.13-0.24)) (1 - (1.24/1.13) ^8) = $26.10

    9 to infinity See working below = $20.260

    Price of stock = 26.10 + 20.260

    Price of stock = 46.26

    Workings

    PV of year 9 to infinity:

    This will be done in two steps

    Step 1

    PV in year 8 terms

    ((2.10 * 1.24^ 8) * 1.06) / (0.13-0.06)

    = 53.86

    Step 2

    PV in year 0 term

    =$53.86 * 1.13^ (-8)

    = $20.260
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