ABC company recently paid dividend of $2

Finance May 02, 2021

ABC company recently paid dividend of $2. However, due to challenging situation analysts forecast that company will not pay any dividend for next two years. They also forecast that from third year company will be paying an annual dividend of $1 which will grow at 4% rate, indefinitely. If investors' required rate of return on ABC company's stock is 12% then what should be the "ABC stock" price today in stock market?

$15.1

None of the available choices

$13%

$9.96

$9.05

Clear my choice

Expert Solution

Computation of Current Stock Price:

Current Stock Price = Dividend for Year 3 / (1+Required Rate of Return)^3 + Terminal Value/(1+Required Rate of Return)^3

= $1 / (1+12%)^3 + ($1*(1+4%)/(12%-4%))/(1+12%)^3

= $1 / 0.71178 + $13/0.71178

= $0.71 + $9.25

Current Stock Price = $9.96

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