Burke Tires just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?
A) $41.59
B) $42.65
C) $43.75
D) $44.87
E) $45.99

Question

Quizplus · Accepted Answer

rs = 9.0%
 $\begin{array} { l c c c c } 
\text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Growth rates: } & & 30.0 \% & 10.0 \% & 5.0 \% \
\text { Dividend } & \$ 1.32 & \$ 1.716 & \$ 1.888 & \$ 1.982 \
\text { Horizon value } = \mathrm { D } _ { 3 } / \left( r _ { 5 } - \mathrm { g } _ { 3 } \right) = & & 49.550 & & \
\hline \text { Total CFs } & & \$ 1.716 & \$ 51.437 & \
\text { pV of CFs } & & \$ 1.574 & \$ 43.294 &
\end{array}$ 
Stock price = $44.87

Burke Tires Just Paid a Dividend of D0 = $1