Suppose a stock has a current dividend of $3. In the first 4 years, the stock will grow at 8% per year. The stock will pay the following dividends and has the following required return:Year 1 dividend:Year 2 dividend:Year 3 dividend:Year 4 dividend:Required return:12.0%After the fourth year, the dividends will grow at:6.0%What is the price of the stock? First, we need to find the price of the stock when it begins a constant growth rate, which is in Year 4. The price of the stock in Year 4 will be:Price in Year 4:The price today is the present value of the future dividends, plus the present value of the future price, so:Price today: Suppose we have a stock with the following information:Dividend Next year:$5.00Dividend growth rate:6.00%Required return:15.00%With this growth rate, the dividend next year will be:So, the stock price today with the constant dividend growth model is:Stock price today:The constant dividend growth equation is the present value of a growing perpetuity, but we should cautiosame information from above, we can calculate the stock price for various growth rates.g0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%10.00%Stock price

Step 1: Calculate Dividends for the Initial 4 Years1. Year 1 Dividend (D1): The current dividend…

Answered: Suppose a stock has a current dividend…

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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