To determine: The current stock price.
Introduction:
Stock price is a price of a share on the number of saleable stock of a company.
Non-constant growth rate model is used when there are two growth rates of dividends. It is also known as the supernormal growth rate. This model can be used to determine the price of a stock.
Answer to Problem 18QP
The current stock price is $60.4524.
Explanation of Solution
Given information:
Y Company has paid dividends of $2.50 and the company expects the dividends to grow at the rate of 25% for the next three years, the required
Formula:
The formula to calculate the stock price in Year 3:
Where,
P3 refers to the price of the stock in Year 3
Do refers to the current year dividend paid
R refers to the required rate of return on its stock
g1 refers to the expected growth rate of dividend
g2 refers to the constant rate of growth
The formula to calculate the current stock price:
Where,
Po refers to the current price of the stock
D1…Dn refers to the next period expected dividend per share
P3 refers to the price of the stock in Year 3
R refers to the required rate of return on its stock
n refers to the number of years
Compute the stock price in Year 3:
Hence, the stock price in Year 3 is $73.9395.
Compute the current stock price:
Hence, the current stock price is $60.4524.
Want to see more full solutions like this?
Chapter 7 Solutions
Essentials of Corp. Finance - With Connect
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education