Your company has a 15

Finance Dec 27, 2020

Your company has a 15.00% required rate of return and will not pay any dividends for the next seven years. At the beginning of year 8, it will pay a dividend of $4.50 per share. The dividend (always paid at the beginning of a year) is expected to grow at 9.50% annually from that point onwards. Calculate the stock price today.

Expert Solution

The price is computed as follows:

Price in year 6 is computed as follows:

= (Dividend in year end 7 or beginning of year 8) / (required rate of return - growth rate)

= $ 4.50 / (0.15 - 0.095)

= $ 81.81818182

So, the current price will be as follows:

= Price in year 6 / (1 + required rate of return)⁶

= $ 81.81818182 / 1.15⁶

= $ 35.37

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