McGonigal's Meats, Inc. currently pays no dividends. The ﬁrm plans to begin paying dividends in three years. The ﬁrst dividend will be $1 and dividends are expected to grow at 5% thereafter. Given
A required return of 15%, what would you pay for the stock today?

Question

Quizplus · Accepted Answer

Using the dividend discount model: 
D1 = $1(1 + 0.05) = $1.05 
D2 = $1.05(1 + 0.05) = $1.1025 
D3 = $1.1025(1 + 0.05) = $1.1576 
P3 = D4 / (r - g) = $1.2175 / (0.15 - 0.05) = $12.175 
P0 = $1.1576 / (1 + 0.15) ^3 + $12.175 / (1 + 0.15) ^3 = $7.56