The growth in dividends of XYZ, Inc. is expected to be 10% per year for the next two years, followed by a growth rate of 5% per year for three years. After this five-year period, the growth in dividends is expected to be 2% per year, indefinitely. The required rate of return on XYZ, Inc. is 12%. Last year's dividends per share were $2.00. What should the stock sell for today?
A) $8.99
B) $25.21
C) $40.00
D) $110.00
E) None of the options are correct.

Question

Quizplus · Accepted Answer

The stock price today can be calculated using the dividend discount model (DDM) with multiple growth rates. Calculate the dividends for each year, discount them to present value, and then calculate the present value of the perpetuity starting in year 6. The sum of these present values gives the stock price today.

The Growth in Dividends of XYZ, Inc