Baldwin Corp.just paid a dividend of $2.00.Over the next two years,this dividend is expected to growth by 20% per year.After two years,dividend growth is expected to level off at 10%.If the required rate of return on Baldwin stock is 12%,what should be the price of Baldwin stock today?

Question

Quizplus · Accepted Answer

Step 1 - Calculate the present value of the high-growth cash flows.
PV = 11ea7fdb_fbf7_394e_a768_1ba618e00981_TB2902_11 = $2.14
PV = 11ea7fdb_fbf7_394f_a768_9ffc75227929_TB2902_11 = $2.30
Step 2 - Add these cash flows together.
2.14 + 2.30 + = $4.44
Step 3 - Calculate the constant-growth cash flows and discount them back to today. 11ea7fdb_fbf7_3950_a768_cbac6df0ac80_TB2902_11 = 11ea7fdb_fbf7_6061_a768_69e7484a13ff_TB2902_11 11ea7fdb_fbf7_6062_a768_59d841c5b919_TB2902_11 = 11ea7fdb_fbf7_6063_a768_130912d00a97_TB2902_11 = $158.40
PV = 11ea7fdb_fbf7_6064_a768_b52277a5305c_TB2902_11 = $126.28
Step 4 - Add the two discounted totals together to get the stock price today.
4.44 + 126.28 = $130.72