A stock just paid an annual dividend of $0.40 a share. The dividends are expected to grow at 15 percent for 5 years and then 3 percent forever. If the required return is 11 percent, what is the price of the stock?

Question

Quizplus · Accepted Answer

The price of the stock is calculated using the dividend discount model with two growth stages. First, calculate the dividends for the first 5 years with 15% growth, then calculate the terminal value at year 5 using the 3% perpetual growth rate. Discount all these cash flows back to the present value using the required return of 11%. The correct price is $8.37.

A Stock Just Paid an Annual Dividend of $0