Chartreuse County Choppers Inc. is experiencing rapid growth. The company expects dividends to grow at 25% per year for the next 11 years before leveling off at 6% into perpetuity. The required return on the company's stock is 12%. If the dividend per share just paid was $1.74, what is the stock price? Answer:

Stock price is $142.13

Explanation:

Given that:

Dividends (D) = $1.74

Dividend grow rate (g) = 25% = 0.25

Required return (R) = 12% = 0.12

Growth rate period (T) = 11 years

Perpetuity (p) = 6% = 0.06

Stock price = [D (1 + g) / (R-g) ] {1 - [ (1 + g) / (1 + R) ]^T} + [ (1 + g) / (1 + R) ]^T[D (1 + p) / (R-p) ]

Substituting values:

Stock price = [1.74 (1 + 0.25) / (0.12-0.25) ] {1 - [ (1 + 0.25) / (1 + 0.12) ]¹¹} + [ (1 + 0.25) / (1 + 0.12) ]¹¹[1.74 (1 + 0.06) / (0.12 - 0.06) ]

Stock price = [ (-16.73) * (-2.34) ] + [ (3.35) * (30.74) ] = 39.1482 + 102.979 = $142.13

Stock price is $142.13