# The XYZ Company paid \$1.25 dividend yesterday. Its dividend growth rate is expected to be constant at 24.50% for 2 years, after which dividends are expected to grow at a rate of 5.95% forever. Its required return (rs) is 11.70%. What is the best estimate of the current stock price?Round your answer to two decimal places. For example, if your answer is \$345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72. A. \$26.51B. \$38.50C. \$37.24D. \$35.98E. \$31.56

Question
26 views
The XYZ Company paid \$1.25 dividend yesterday. Its dividend growth rate is expected to be constant at 24.50% for 2 years, after which dividends are expected to grow at a rate of 5.95% forever. Its required return (rs) is 11.70%. What is the best estimate of the current stock price?

A. \$26.51
B. \$38.50
C. \$37.24
D. \$35.98
E. \$31.56
check_circle

Step 1

Current price of stock will consist present value of all future dividend.

The below expression will help to calculate price of the stock. help_outlineImage Transcriptionclosedx(1+5) dx{1+5}° (1 dx{-1E (1+1) (1+1) Price of stock (1+1 Here dis dividend 8 is dividend growth in first two years 8, is dividend growth after two year. fullscreen
Step 2

Using formula for sum of infinite geometric progression, the above expression can be modified further, as after 2 years dividend growth rate is fixed and receives in perpetuity. help_outlineImage Transcriptionclosedx(-s)d-d5{-8) + + (1-1X (1-i) (1+) Price of share 81 + (1-1 dx(1+g) dx(1+g (1-1X (1-1)2 (1+1) (1+g2) 1- Here lis the first term of geometric progression (1-E + 82 is the common ratio (1+1) fullscreen
Step 3

Substitute \$1.25 for d, 0.245 for g1, 0.0595 for g2 and 11.7% for i ... help_outlineImage Transcriptionclose\$1.25x(1 0.245) \$1.25x(10.245 ) \$1.25x(10.245) x (1+0.0595) (1 0.117) (1-0.117) (1-0.117)2 Price of stock \$1.25x (1 0245)x (1+0.0595) (1+0.117) s1.25x(1+0.245) S1.25x (1+ 0.245 (1 0.117)2 (1-0.117) s1.25x (1+0245x(1+ 0.0595) 1 (1+0.117) (1+0.0595) 1- (1 0.117 \$1.55625 \$193 753 125 \$2.0528 1 1.39366 1-0.948522 1.117 1247689 (\$1.39324 \$15529 + \$28.6133) -\$31.56 fullscreen

### Want to see the full answer?

See Solution

#### Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in 