Ackert Company's last dividend (D0) was $0.60. The dividend growth rate is expected to be constant at 7.0% each year for 2 years, after which dividends are expected to grow at a rate of 4.0% forever. The firm's required return (rs) is 10.0%. What is the best estimate of the current stock price?

Question

Business

Bianca Pittman

2 June, 08:40

Ackert Company's last dividend (D0) was $0.60. The dividend growth rate is expected to be constant at 7.0% each year for 2 years, after which dividends are expected to grow at a rate of 4.0% forever. The firm's required return (rs) is 10.0%. What is the best estimate of the current stock price?

+2

Answers (1)

Know the Answer?

Jean Sellers · Answer 1

Price per share = $10.99

Explanation:

The dividednd are growing at 7% per annum for 2 year so we will use the DCF approach to calculate price of the share today. We will also calculate the terminal value after 2 years when growth becomes constant and discount it back to today to calculate the price today.

The formula for DCF approach and calculations are below:

P0 = D0 * (1+g) / 1+r + ... + [D0 (1+g) ^n / r-g] / (1+r) ^n

P0 = 0.6 * (1+0.07) / 1 + 0.1 + 0.6 * (1+0.07) ² / (1+.01) ² + [ (0.6 * (1+0.07) ² * (1+0.04) / 0.1-0.04] / (1+0.1) ²

P0 = $10.9918 or 10.99