A company currently pays a dividend of $2 per share. it is estimated that the company's dividend will grow at a rate of 20% per year for the next 2 years, and then at a constant rate of 7% thereafter. the required rate of return is 12.3%. what is your estimate of the stock's current price?

Question

Business

Briley Gibson

20 April, 02:59

A company currently pays a dividend of $2 per share. it is estimated that the company's dividend will grow at a rate of 20% per year for the next 2 years, and then at a constant rate of 7% thereafter. the required rate of return is 12.3%. what is your estimate of the stock's current price?

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Bean · Answer 1

Stock price = $62.564

Explanation:

The Discounted Cash flow (DCF) Model; This is a technique used to value the worth of an asset. According to this model, the value of an asset is the sum of the present values of the future cash flows that would arise from the asset discounted at the required rate of return. Using this model,

PV of dividend in year 1 = 2 * 1.2 * (1.123^-1) = 2.1371

PV of dividend in year 2 = (2 * 1.2^2 * (1.123^-2) = 2.2836

PV of dividend in year 3 and beyond = D (1+g) / (r-g)

r-12.3%, g - 7%

=2 * 1.2^2 * 1.07 / (0.123-0.07) = 58.14339623

Total PV = 2.1371 + 2.2836 + 58.1433 = 62.56419695

Stock price = $62.564