This Course\" Marks for this submission: 1.00/1.00. Suppose a common stock pays

Question

This Course" Marks for this submission: 1.00/1.00. Suppose a common stock pays dividends at the end of each period and the stock has just paid a dividend in the amount of $2.9. If the stock's dividend growth rate is 20 percent for the next two periods and then 2.9 percent per period for every period thereafter and the discount rate is 11.4 percent per period, what is the most you should pay for the the constant growth stock valuation model. of stock according to tion Answer: 15,0607 Check Marks for this submission: 0.001.00

Explanation / Answer

Dividend just paid = D0 = $2.9

Growth rate for next two years = 20%

Dividend for year 1 = D1 = $2.9*1.20 = $3.48

Dividend for year 2 = D2 = $3.48*1.20 = $4.176

Growth rate from year 3>

Dividend for year 3 = $4.176*1.029 = $4.297

Stock price at year 2 = Dividend for year 3/(discount rate-growwth rate)

Stock price at year 2 = $4.297/(0.114-0.029) = $50.554

Present value of D1 = $3.48/1.114 = $3.124

Present value of D2 = $4.176/1.1142 = $3.365

Present value of year 2 stock price = $50.554/1.1142 = $40.737

Current stock price = $3.124 + $3.365 + $40.737 = $47.23

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