A stock is expected to pay its first annual dividend in 3 years. The dividend is expected to stay constant at $1.4 per year for 18 years and then grow at 5% annually forever. The required rate of return is 14%. (hint: non-standard dividends; two-stage of dividends) Part 1 What is the PV today of the first-stage dividends? (18 years of constant $1.4 dividend per year is the first stage) Part 2 What is the PV today of the second-stage dividends? (dividends after the 18 years of constant dividend is the second stage) Part 3 What should be the stock price now?

A stock is expected to pay its first annual dividend in 3 years. The dividend is expected to stay constant at $1.4 per year for 18 years and then grow at 5% annually forever. The required rate of return is 14%. (hint: non-standard dividends; two-stage of dividends) Part 1 What is the PV today of the first-stage dividends? (18 years of constant $1.4 dividend per year is the first stage) Part 2 What is the PV today of the second-stage dividends? (dividends after the 18 years of constant dividend is the second stage) Part 3 What should be the stock price now?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter7: Corporate Valuation And Stock Valuation

Section: Chapter Questions

Problem 18MC

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Part 1

What is the PV today of the first-stage dividends? (18 years of constant $1.4 dividend per year is the first stage)

Part 2

What is the PV today of the second-stage dividends? (dividends after the 18 years of constant dividend is the second stage)

Part 3

What should be the stock price now?

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

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