A stock will not pay dividends for the next 3 years and will resume paying divid

Question

A stock will not pay dividends for the next 3 years and will resume paying dividend at t=4. The dividend is estimated to be $ 5 per share and will grow at a constant rate of 2% forever. If the required rate of return on equity is 12%, what is the stock value? A stock will not pay dividends for the next 3 years and will resume paying dividend at t=4. The dividend is estimated to be $ 5 per share and will grow at a constant rate of 2% forever. If the required rate of return on equity is 12%, what is the stock value?

Explanation / Answer

Given

D4 = 5

According to dividend-discount model,

P0 = D1/(R-G)

P0 = Current stock price

D1 - Dividend at t =1

R - Required rate

G - Growth rate

P3 = D4/(R-g) = 5/(0.12-0.02) = 50

Stock price is $50 in 3 years,

Current stock price = 50/(1+0.12)^3 = $35.59

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