The growth in dividends of Music Doctors, Inc. is expected to be 8% per year for the next two years, followed by a growth rate of 4% per year for three years. After this five-year period, the growth in dividends is expected to be 3% per year, indefinitely. The required rate of return on Music Doctors, Inc. is 11%. Last year's dividends per share were $2.75. What should the stock sell for today?

Question

Quizplus · Accepted Answer

The stock price today is calculated using the dividend discount model with varying growth rates. Calculate the dividends for each year, discount them to present value, and then calculate the present value of the perpetuity starting from year 6. The sum of these present values gives the stock price today, which is approximately $39.71.

The Growth in Dividends of Music Doctors, Inc