Finance Question: please help, thank you. You are considering the purchase of a

Question

Finance Question: please help, thank you.

You are considering the purchase of a common stock that paid a dividend of $2.00 yesterday. You expect this stock to have a growth rate of 15 percent for the next 3 years, resulting in

dividends of D1=$2.30, D2=$2.645, and D3=$3.04. The long-run normal growth rate after year 3 is expected to be 10 percent (that is, a constant growth rate after year 3 of 10% per

year forever). If you require a 14 percent rate of return, how much should you be willing to pay for this stock?

Explanation / Answer

One should be willing to pay the intrinsic value or fair price, computed using the present value of dividends

Intrinsic value or fair Price=2.3/1.14+2.645/1.14^2+3.04/1.14^3+(3.04*(1+10%)/(14%-10%))/1.14^3=62.53

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