Cherry Auto Sales just opened and does not expect to pay a dividend during its first year.At the end of its second year,Cherry's owners expect to pay a $2.00 dividend and plan to increase it 7% annually.If the required return is 20%,what should Cherry's stock price be?

Question

Quizplus · Accepted Answer

Step 1 - Calculate the stock price when the stock begins paying a dividend at the end of year 2. 11ea7fdb_fbf1_6d5c_a768_3fa2534b831b_TB2902_11 = 11ea7fdb_fbf1_6d5d_a768_012e5f801d9c_TB2902_11 11ea7fdb_fbf1_6d5e_a768_49cf51dd82bf_TB2902_11 = 11ea7fdb_fbf1_6d5f_a768_b103a8598836_TB2902_11 = 15.38
Step 2 - Discount that price back today from year 2.
PV = 11ea7fdb_fbf1_9470_a768_173e230314e0_TB2902_11 PV = 11ea7fdb_fbf1_9471_a768_a3f9d532b4d7_TB2902_11 = $12.82

Cherry Auto Sales Just Opened and Does Not Expect to Pay