Answer :
Answer:
Dn = Do x (1+g)^n
D1 = 1.70 x (1+0.20)^1 = 2.04
D2 = 1.70 x (1+0.20)^2 = 2.448
Year Dividend
1 2.040
2 2.448
3 2.938
4 3.525
5 4.230
6 5.076
7 6.091
8 7.310
Price at the end of 8th year = D8 x (1+g)/(Ke- g)
Price at the end of 8th year = 7.310 x (1+0.05)/ (0.15-0.05)
Price at the end of 8th year = $76.755
Year Cash flows PV Factor 15% Present Value
1 2.040 0.8696 1.77
2 . 2.448 0.7561 1.85
3 2.938 0.6575 1.93
4 3.525 0.5718 2.02
5 . 4.230 0.4972 2.10
6 5.076 0.4323 2.19
7 6.091 0.3759 2.29
8 84.065 0.3269 27.48
Total 41.64
Hence, the price of the stock today is $41.64
The price of the stock today is $41.65.
The two stage growth dividend model would be used to determine the price of the stock today.
First stage:
Value of stock in year 1 = $1.70 x 1.2 = $2.04
Value of stock in year 2 = $1.70 x 1.2² = $2.45
Value of stock in year 3 = $1.70 x 1.2³ = $2.94
Value of stock in year 4 = $1.70 x 1.2^4 = $3.53
Value of stock in year 5 = $1.70 x 1.2^5 = $4.23
Value of stock in year 6 = $1.70 x 1.2^6 = $5.08
Value of stock in year 7 = $1.70 x 1.2^7 = $6.09
Value of stock in year 8 = $1.70 x 1.2^8 = $7.31
Stage 2
Value of the stock in year 8 x (1 + 5%) / (discount rate - growth rate)
$7.31 x 1.05 / (15% - 5%) = $76.75
Determine the present value of the stock. Present value can be determined using a financial calculator.
Present value = $41.65
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