Sedge Inc. has a 12% required rate of return. It does not expect to pay dividends for seven years. At the end of year 8, it will pay $2.00 per share in dividends. At that time, Sedgwick expects its
Dividends to grow at 7% forever. Calculate the stock price now.

Question

Quizplus · Accepted Answer

The correct answer is A.The stock price now can be calculated using the dividend discount model:```Stock Price = Present Value of Future Dividends / Required Rate of Return```The present value of future dividends can be calculated as follows:```Present Value of Future Dividends = $2.00 / (1 + 0.12)^8 + $2.00 * (1 + 0.07) / (0.12 - 0.07) * 1 / (1 + 0.12)^8= $2.00 / 2.0736 + $2.00 * 1.07 / 0.05 * 1 / 2.0736= $0.9644 + $20.07 / 0.05 * 1 / 2.0736= $0.9644 + $401.40 / 2.0736= $0.9644 + $193.60= $194.56```Therefore, the stock price now is:```Stock Price = $194.56 / 0.12= $1,621.33```Rounded to the nearest cent, the stock price now is $1,621.33.

Sedge Inc Has a 12% Required Rate of Return