The Wei Company\'s lastdividend was $1.75. The dividend growth rate is expected

Question

The Wei Company's lastdividend was $1.75. The dividend growth rate is expected to beconstant at 1.50% for 2 years, after which dividends are expectedto grow at a rate of 8.00% forever. Wei's required return(rs) is 12.00%. What is Wei's current stockprice? The Wei Company's lastdividend was $1.75. The dividend growth rate is expected to beconstant at 1.50% for 2 years, after which dividends are expectedto grow at a rate of 8.00% forever. Wei's required return(rs) is 12.00%. What is Wei's current stockprice? $41.83 $43.08 $44.38 $45.71 $47.08

Explanation / Answer

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

Wei’s required return (R) = 12%

Dividend growth rate is expected to be constant at = 1.50% for 2years

Calculating Dividend for 2 years:

Dividend payment in 1st year(D1) = $1.75 * (1.015)           =          1.77625

Dividend payment in 2ndyear(D2) = $1.77625 *1.015         =         $1.80289

After 2 years dividends are expected to grow at 8%forever:

Dividend payment in 3rd year(D3) = $1.80289 *1.08         =          $1.9471

                                   

                                   

                        P2 =D3 / (R-g)

                       P2 = $1.9471 / (0.12-0.08)

                       P2 = $ 48.68

Calculating Current Stock Price of the Company(P0):

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

     = [$1.77625/(1.12) +$1.80289/(1.12)2 + $48.68/(1.12)2]

     = [$1.5859+ $1.43725+ $38.81]

     = $41.83

Current Stock Price (P0) =$41.83

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