The Felix Corp.projects to pay a dividend of $.75 next year and then have it grow at 12% for the following three years before growing at 8% indefinitely thereafter.The equity has a required return of 10% in the market.The price of the stock should be ___.

Question

Quizplus · Accepted Answer

The price of the stock is calculated using the dividend discount model (DDM) with varying growth rates. First, calculate the present value of dividends for the first four years, then calculate the terminal value at the end of year 4 using the Gordon Growth Model for the indefinite growth period, and finally discount all cash flows to the present value using the required return of 10%.