A firm expects to increase its annual dividend by 20 percent per year for the next two years and by 15 percent per year for the following two years. After that, the company plans to pay a constant annual dividend of $3 a share. The last dividend paid was $1.00 a share. What is the current value of this stock if the required rate of return is 12 percent?

Question

Quizplus · Accepted Answer

The current value of the stock is calculated by finding the present value of the expected dividends. The dividends for the first four years are calculated using the growth rates, and the constant dividend is used thereafter. The present value of these dividends is then calculated using the required rate of return.

A Firm Expects to Increase Its Annual Dividend by 20