A7X Corp. just paid a dividend of $1.60 per share. The dividends are expected to

Question

A7X Corp. just paid a dividend of $1.60 per share. The dividends are expected to grow at 19 percent for the next eight years and then level off to a growth rate of 5 percent indefinitely. If the required return is 14 percent, what is the price of the stock today?

A7X Corp. just paid a dividend of $1.60 per share. The dividends are expected to grow at 19 percent for the next eight years and then level off to a growth rate of 5 percent indefinitely. If the required return is 14 percent, what is the price of the stock today?

Explanation / Answer

Price of the stock today =  D1/(1+r) +  D2/(1+r)^2 +  D3/(1+r)^3 +  D4/(1+r)^4 +  D5/(1+r)^5 +  D6/(1+r)^6 +  D7/(1+r)^7 +  D8/(1+r)^8 + (D9/(r-g))/(1+r)^3

Price of the stock today = 1.60*1.19/1.14 + 1.60*1.19^2/1.14^2 + 1.60*1.19^3/1.14^3 + 1.60*1.19^4/1.14^4 + 1.60*1.19^5/1.14^5 + 1.60*1.19^6/1.14^6 + 1.60*1.19^7/1.14^7 + 1.60*1.19^8/1.14^8 + (1.60*1.19^8*1.05/(14%-5%))/1.14^8

Price of the stock today = $ 41.92

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