Question

Asked Oct 7, 2019

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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.

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. $26.51

B. $38.50

C. $37.24

D. $35.98

E. $31.56

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.

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.

Step 3

Substitute $1.25 for *d*, 0.245 for *g1*, 0.0595 for *g2* and 11.7% for *i* ...

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