Today your company paid a dividend (D0) of $3 per share

Finance Dec 24, 2020

Today your company paid a dividend (D0) of $3 per share. The growth rate of the dividend is expected to be 10% for the next two years, and then 6% thereafter. The cost of capital is 10%. For each question, choose the closest answer.

What is your estimate of your firm’s stock price two years from now (P2)?

a) $96.20 b) $79.55 c) $85.55 d) $78.31 e) $72.31

Expert Solution

D1=(3*1.1)=3.3

D2=(3.3*1.1)=3.63

Value after year 2=(D2*Growth rate)/(Cost of capital-Growth rate)

=(3.63*1.06)/(0.1-0.06)

=$96.195

Hence the correct option is:

$96.2(Approx)

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