Orwell building supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?

Question

Quizplus · Accepted Answer

$\begin{array}{lr}
\text { Last dividend }\left(\mathrm{D}_{0}\right) & \$ 1.75 \
\text { Short-run growth rate } & 25 \% \
\text { Long-run growth rate } & 6 \% \
\text { Required return } & 12 \%
\end{array}$ 
 $$\begin{array} { l c c c c } 
\text { Year } & 0 & 1 & 2 & 3 \
\hline & & 25.00 \% & 25.00 \% & 6.00 \% \
\text { Dividend } & \$ 1.7500 & \$ 2.1875 & \$ 2.7344 & \$ 2.8984 \
\text { Terrinal value } = \mathrm { D } _ { 3 } / \left( r _ { s } - \mathrm { g } _ { 3 } \right) = & & 48.3073 & & \
\hline \text { Total CFs } & & \$ 2.1875 & \$ 51.0417 &\
\text { PV of CFs } && \$ 19531 &  \$ 406901
\end{array}$$ 
Price = Sum of PVs = $42.64

Orwell Building Supplies' Last Dividend Was $1