Starskeep, Inc., is a fast-growing technology company. The firm projects a rapid growth of 40 percent for the next two years and then a growth rate of 20 percent for the following two years. After that, the firm expects a constant-growth rate of 8 percent. The firm expects to pay its first dividend of $1.25 a year from now. If your required rate of return for such stocks is 20 percent, what is the current price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.)

Question

Quizplus · Accepted Answer

The correct answer is A because the current price of the stock is $15.63. The formula for the current price of a stock is:P0 = D1 / (r - g)where:P0 is the current price of the stockD1 is the expected dividend one year from nowr is the required rate of returng is the constant growth rateIn this case, D1 = $1.25, r = 20%, and g = 8%. Plugging these values into the formula, we get:P0 = $1.25 / (0.20 - 0.08) = $15.63