A7X Corp. just paid a dividend of $2.30 per share. The dividends are expected to grow at 15 percent for the next eight years and then level off to a growth rate of 6 percent indefinitely. If the required return is 14 percent, what is the price of the stock today?

Question

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valetta valetta · Answer 1 · 2019-11-29T07:51:28+01:00

Answer:

$93.22

Explanation:

Data provided in the question:

Dividend paid, D0 = $2.30

Expected growth rate, g = 15% = 0.15

Growth rate for after year 8, g' = 6% = 0.06

Required return, r = 14% = 0.14

Now,

the Dividend for the year 8, D8 = D0 × (1 + g)⁸

= $2.30 × (1 + 0.15)⁸

= $2.30 × 3.06

= $7.036

Thus,

Price of the stock today = D9 ÷ (r - g' )

= [ D8 × ( 1 + g') ] ÷ (r - g' )

= [ $7.036 × ( 1 + 0.06 ) ] ÷ ( 0.14 - 0.06 )

= 7.46 ÷ 0.08

= $93.22