Your company paid a dividend of $2.00 last year. The growth rate is expected to be 4 percent for 1 year, 5 percent the next year, then 6 percent for the following year, and then the growth rate is expected to be a constant 7 percent thereafter. The required rate of return on equity (rs) is 10 percent. What is the current price of the common stock?
A) $53.45
B) $60.98
C) $64.49
D) $67.47
E) $69.21

Question

Quizplus · Accepted Answer

The current price of the stock is calculated using the dividend discount model with varying growth rates. Calculate the dividends for the first three years using the respective growth rates, then calculate the terminal value at the end of year 3 using the constant growth rate of 7%. Discount all these cash flows back to the present value using the required rate of return of 10%. The correct calculation results in a price of $67.47.

Your Company Paid a Dividend of $2