Medici Banking plc., is experiencing a period of rapid growth. Earnings and dividends per share are expected to grow at a rate of 17 percent in the first year, 18 percent during the second year, 15 percent in the third year, and 4 percent thereafter. Yesterday, Medici paid a dividend of £1.25. If the required rate of return on the stock is 10 percent, what is the price of a share of the stock today?

Question

Business

Brennen Maddox

28 November, 01:59

Medici Banking plc., is experiencing a period of rapid growth. Earnings and dividends per share are expected to grow at a rate of 17 percent in the first year, 18 percent during the second year, 15 percent in the third year, and 4 percent thereafter. Yesterday, Medici paid a dividend of £1.25. If the required rate of return on the stock is 10 percent, what is the price of a share of the stock today?

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Answers (1)

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Rafael Bryan · Answer 1

The price of the stock today is $30.09

Explanation:

Using the dividend discount model approach, we can calculate the price of the stock today. The DDM bases the price on the present value of the expected future dividends from the stock. Thus, the price today for this stock using DDM will be,

P0 = 1.25 * (1+0.17) / (1+0.1) + 1.25 * (1+0.17) * (1+0.18) / (1+0.1) ^2 +

1.25 * (1+0.17) * (1+0.18) * (1+0.15) / (1+0.1) ^3 +

[ (1.25 * (1+0.17) * (1+0.18) * (1+0.15) * (1+0.04) / (0.1 - 0.04)) / (1+0.1) ^3 ]

P0 = $30.09