McIver's Meals, Inc. currently pays a $1 annual dividend. Investors believe that dividends will grow at 15% next year, 10% annually for the two years after that, and 5% annually thereafter. Assume the required return is 10%. What is the current market price of the stock?

Question

Quizplus · Accepted Answer

The current market price of the stock can be calculated using the dividend discount model with varying growth rates. Calculate the dividends for the first three years and then use the Gordon Growth Model for the terminal value from year 4 onwards. Discount all these cash flows back to the present value using the required return of 10%. This results in a price of approximately $25.09.