The In-Tech Co. has just paid a dividend of $1 per share. The dividends are expected to grow at 25% per year for the next three years and at the rate of 5% per year thereafter. If the required rate of return on the stock is 18%(APR), what is the current value of the stock?
A) $12.97
B) $11.93
C) $15.20
D) None of the above

Question

Quizplus · Accepted Answer

The current value of the stock is calculated using the dividend discount model with two growth stages. The dividends for the first three years are $1.25, $1.5625, and $1.9531. The terminal value at the end of year 3 is calculated using the constant growth formula: $1.9531 * (1.05) / (0.18 - 0.05) = $15.81. The present value of these cash flows at 18% is approximately $12.97.