The Upton Company\'s lastdividend was $1.75. Its dividend growth rate is expecte

Question

The Upton Company's lastdividend was $1.75. Its dividend growth rate is expected to beconstant at 18.00% for 2 years, after which dividends are expectedto grow at a rate of 6.00% forever. Upton's required return(rs) is 12.00%. What is Upton's current stockprice? The Upton Company's lastdividend was $1.75. Its dividend growth rate is expected to beconstant at 18.00% for 2 years, after which dividends are expectedto grow at a rate of 6.00% forever. Upton's required return(rs) is 12.00%. What is Upton's current stockprice? $37.15 $38.10 $39.06 $40.03 $41.03 The Upton Company's lastdividend was $1.75. Its dividend growth rate is expected to beconstant at 18.00% for 2 years, after which dividends are expectedto grow at a rate of 6.00% forever. Upton's required return(rs) is 12.00%. What is Upton's current stockprice? Question 20 answers $37.15 $38.10 $39.06 $40.03 $41.03

Explanation / Answer

Upton Company’s last dividend (D0) = $1.75

Upton’s required return (R) = 12%

Dividend growth rate is expected to be constant at = 18% for 2years

Calculating Dividend for 2 years:

Dividend payment in 1st year (D1) = $1.75*(1.18)              =          $2.065

Dividend payment in 2nd year(D2) = $2.065* 1.18              =          $2.4367

After 2 years dividends are expected to grow at 6%forever:

                                   

                        P2 =D3 / (R-g)

                       P2 = $2.5829 / (0.12-0.06)

Calculating Current Stock Price of the Company(P0):

P0 = [D1/(1+R) +D2/(1+R)2+ P2/(1+R)2]

     = [$2.065/(1.12) +$2.4367/(1.12)2 + $43.048/(1.12)2]

     = [$1.84375+ $1.9425+ $34.317]

     = $38.10

Current Stock Price (P0) =$38.10

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