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Homework answers / question archive / Your company has a 15
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.
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
