Answer:
Explanation:
The price of a stock is the present value of the future dividends.
1. Dividends for the next three years:
Considering the dividends are expected to grow at a rate of 25% for the next three years:
2. Calculate the present value, A, of those three dividends at the required return rate of 11%.
[tex]A=\dfrac{\$1.44}{1.11}+\dfrac{\$1.80}{1.11^2}+\dfrac{\$2.25}{1.11^3}[/tex]
[tex]A=\$4.40[/tex]
3. Calculate the value of the dividends from year 4.
The formula for the price of a stock when the dividends, D, paid since the next year, will grow at a constant rate, g, less than the expected return, r is.
[tex]Price=\dfrac{D}{r-g}[/tex]
Here, D = $1.15 × 1.25, g = 6% and r = 11%
[tex]Price=\dfrac{\$1.15\times 1.25}{0.11-0.06}[/tex]
[tex]Price=\dfrac{\$1.15\times 1.25}{0.11-0.06}=\$28.75[/tex]
That price must be discounted from the year 3 to the current year:
[tex]B=\dfrac{\$28.75}{1.11^3}=\$21.02[/tex]
4. Add the values of the two streams of dividends, A + B
