Red Sun Rising just paid a dividend of $2.19 per share. The company said that it will increase the dividend by 15 percent and 10 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.7 percent. If the required return is 10.7 percent, what is the stock price today?

Stock price = $38.02

Explanation:

The price of a share can be calculated using the dividend valuation model

According to this model the value of share is equal to the sum of the present values of its future cash dividends discounted at the required rate of return.

If dividend is expected to grow at a given rate, the value of a share is calculated using the formula below:

Price=Do (1+g) / (k-g)

Year PV of dividend

1 2.19 * (1.15) * 1.107^ (-1) = 2.275

2 2.19 * 1.15 * 1.1 * 1.107^ (-2) = 2.260

Year 3 dividend

PV in year 2 = 2.19 * 1.15 * 1.1 * 1.037 / (0.107-0.037) = 41.04

PV in year 0 = 41.040 * 1.107 (-2) = 33.490

Stock price =

2.27 + 2.260 + 33.490

=$38.02