Doc Brown, Inc. just paid a dividend of D0 = $1.21. Analysts expect the company's dividend to grow by 24% this year, by 20% in Year 2, and at a constant rate of 7.2% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?

The correct answer is $93.14.

Explanation:

According to the scenario, the given data are as follows:

D0 = $1.21

Dividend 1st year = $1.21 * 1.24

Dividend 2nd year = $1.21 * 1.24 * 1.20

Dividend 3rd year = $1.21 * 1.24 * 1.20 * 1.072

So, we can calculate the stock's current market value by using following formula:

Stock current market value = $1.21 (1.24) : (1.09) + $1.21 (1.24) (1.20) : (1.09) 2 + 1.21 (1.24) (1.20) (1.072) : (0.09 - 0.072) (1.09) 2

= $1.38 + $1.51 + $90.25

Stock Current market Price = $93.14