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pay a dividend of $2.75 and $2.30 over the next two years, respectively. After that, your company is expected to increase its annual dividend at 3.1 percent. What is the stock price today if the required return is 10.5 percent

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Kolawole845

Answer:

= $33.37

Explanation:

The price of a stock is the present value (PV) of the future dividends discounted at the required rate of return.

So we determine the price of the stock as follows:

                                                           PV

Year 1         2.75× 1.105^(-1)        =2.48

Year 2         2.30 × 1.105^(-2)    = 1.88

Year 3 to infinity

This will be done in two(2) steps

Step 1

PV of dividend in year 2 terms

2.30 × 1.105 × 1.031/(0.105-0.031)

= $35.409

Step 2

PV of dividend in year 0 terms

= $35.409×1.105^(-2)

PV of year 3 dividend to infinity =$28.99

Price of stock = 2.48 + 1.88 + 28.99

                      = $33.37

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