The last dividend paid by Wilden Corporation was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price?

Question

Quizplus · Accepted Answer

$\begin{array}{lr}
\text { Last dividend }\left(\mathrm{D}_{0}\right) & \$ 1.55 \
\text { Short-run growth rate } & 1.50 \% \
\text { Long-run growth rate } & 8.00 \% \
\text { Required return } & 12.00 \%
\end{array}$ 
 $\begin{array}{lcccc}
\text { Year } & 0 & 1 & 2 & 3 \
& & 1.50 \% & 1.50 \% & 8.00 \% \
\text { Dividend } & \$ 1.5500 & \$ 1.5733 & \$ 1.5968 & \$ 1.7246 \
\text { Horizon value }=\mathrm{D}_{3} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}_{3}\right)= & & 43.1149 & & \
\hline \text { Total CFs } & & \$ 1.5733 & \$ 44.7118 & \
\mathrm{PV} \text { of CFs } & & \$ 1.4047 & \$ 35.6439 &
\end{array}$ 
Price = Sum of PVs = $37.05

The Last Dividend Paid by Wilden Corporation Was $1