R&D Technology Corporation just paid a dividend of $0.50 per share.Analysts expect its dividend to grow at 24% per year for the next two years and then 8% per year thereafter.If the required rate of return in the stock is 16%,calculate the current value of the stock.

Question

Quizplus · Accepted Answer

To find the current value of the stock, we need to use the dividend discount model:

PV = D1/(1+r) + D2/(1+r)^2 + D3/(1+r)^3 + ... + Dn/(1+r)^n

where PV is the current stock price, D1 is the dividend paid in the first year, r is the required rate of return, and n is the number of years of dividend growth.

Step 1: Find the dividend per share in the first two years
D1 = $0.50 x (1 + 24%) = $0.62
D2 = $0.62 x (1 + 24%) = $0.77

Step 2: Find the dividend per share after the second year
D3 = $0.77 x (1 + 8%) = $0.83

Step 3: Find the present value of future dividends
PV = $0.62/(1.16) + $0.77/(1.16)^2 + $0.83/(1.16)^3 + ...
PV = $0.53 + $0.59 + $5.70 + ...
PV = $8.82

Therefore, the current value of the stock is $8.82, which is closest to option C ($8.82).

R&D Technology Corporation Just Paid a Dividend of $0