Jia's Fashions recently paid a $2 annual dividend. The company is projecting that its dividends will grow by 20 percent next year, 12 percent annually for the two years after that, and then at 6 percent annually thereafter. Based on this information, how much should Jia's Fashions common stock sell for today if her required return is 10.5%?

Question

Quizplus · Accepted Answer

To find the stock price today, calculate the present value of the expected dividends. The dividends for the first three years are $2.40, $2.688, and $3.0096. After that, dividends grow at a constant rate of 6%. Use the Gordon Growth Model for the terminal value at year 3 and discount all cash flows back to the present value using the required return of 10.5%. The calculations show that the stock price today is approximately $66.60.

Jia's Fashions Recently Paid a $2 Annual Dividend