Lifecycle Bicycle Company is expected to pay a dividend in year 1 of $1.20,a dividend in year 2 of $1.50,and a dividend in year 3 of $2.00.After year 3,dividends are expected to grow at the rate of 10% per year.An appropriate required return for the stock is 14%.The stock should be worth _______ today.

Question

Quizplus · Accepted Answer

To calculate the present value of the stock, we can use the formula for the present value of growing perpetuity:

PV = D / (r - g)

Where PV is the present value, D is the dividend in year 1, r is the required return, and g is the growth rate in dividends.

Using the given values, we have:

PV = [ 1.20 / (1+0.14)^1 ] + [ 1.50 / (1+0.14)^2 ] + [ 2.00 / (1+0.14)^3 ] + [ 2.00*(1+0.10) / (0.14-0.10) ]

PV = 0.9524 + 1.0971 + 1.3829 + 40.675

PV = $43.11

Therefore, the stock should be worth $40.67 today. The closest answer choice is B.

Lifecycle Bicycle Company Is Expected to Pay a Dividend in Year