The In-Tech Co. just paid a dividend of $1 per share. Analysts expect its dividend to grow at 25 percent per year for the next three years and then 5 percent per year thereafter. If the required rate of return on the stock is 18 percent, what is the current value of the stock?

Question

Business

Felipe

9 June, 02:16

The In-Tech Co. just paid a dividend of $1 per share. Analysts expect its dividend to grow at 25 percent per year for the next three years and then 5 percent per year thereafter. If the required rate of return on the stock is 18 percent, what is the current value of the stock?

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Jocelyn Hubbard · Answer 1

D1 = $1 (1+0.25) = 1.25

D2 = $1.25 (1+0.25) = 1.5625

D3 = $1.5625 (1+0.25) = 1.953

D4 = $1.953 (1+0.25) = $2.05

Current value = P0 =

= 1.25 / (1+0.18) + 1.5625 / (1+0.18) ^2 + 1.953 / (1+0.18) ^3 + 2.05 / (0.18-0.05) * (1+0.18) ^ (-3) =

=$12.96

Current value of the stock is 12.96