Davis Brothers Incorporated is an apparel manufacturer that paid a $1.50 dividend yesterday.Analysts expect dividends to grow at a constant 20 percent per year for the next four years.From that point forward,dividends are expected to grow at a constant rate of 12 percent forever.The discount rate for a firm of this risk is 15 percent.What should be the current stock price?
A) $65.96
B) $58.23
C) $103.68
D) $73.07
E) $106.79

Question

Quizplus · Accepted Answer

The current stock price can be calculated using the Gordon Growth Model for the period of constant growth and the present value of dividends for the initial high-growth period. Calculate the dividends for the first four years with 20% growth, then use the Gordon Growth Model to find the price at the end of year four with 12% growth. Discount all cash flows back to the present value using the 15% discount rate.

Davis Brothers Incorporated Is an Apparel Manufacturer That Paid a $1.50