R&D Technology Corporation has just paid a dividend of $0.50 per share. The dividends are expected to grow at 24% per year for the next two years and at 8% per year thereafter. If the required rate of return in the stock is 16% (APR), calculate the current value of the stock.
A) $1.11
B) $7.71
C) $8.82
D) None of the above

Question

Quizplus · Accepted Answer

To calculate the current value of the stock, we need to use the dividend discount model. First, we need to find the dividends for the next two years:

Year 1 dividend = $0.50 * (1 + 24%) = $0.62
Year 2 dividend = $0.62 * (1 + 24%) = $0.77

After the second year, the dividends are expected to grow at a rate of 8% per year. We can calculate the dividend in year 3 as follows:

Year 3 dividend = $0.77 * (1 + 8%) = $0.83

Now, we can use the dividend discount model to calculate the current value of the stock:

PV = D1 / (1 + r) + D2 / (1 + r)^2 + D3 / (1 + r)^3 + ... + Dn / (1 + r)^n

where PV = current value of the stock, D1 = dividend in year 1, r = required rate of return, n = number of years in which the stock is expected to grow at a constant rate, and Dn = dividend in the nth year, which grows at a constant rate.

Plugging in the values, we get:

PV = $0.62 / (1 + 16%) + $0.77 / (1 + 16%)^2 + $0.83 / (1 + 16%)^3
PV = $0.537 + $0.609 + $6.674
PV = $7.82

Therefore, the current value of the stock is $8.82 (Option C).

R&D Technology Corporation Has Just Paid a Dividend of $0