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Ackert Company's last dividend (D0) was $0.60. The dividend growth rate is expected to be constant at 7.0% each year for 2 years, after which dividends are expected to grow at a rate of 4.0% forever. The firm's required return (rs) is 10.0%. What is the best estimate of the current stock price? $11.60 $10.16 $12.30 $10.98 $11.20

Respuesta :

Answer:

The current stock price is $10.98

Explanation:

The two stage model of gordon growth will be used to calculate the pricec of stock today.

For the next two years, the dividends will be calculated and discounted back to present value while at the end of the second year, the terminal value will be calculated and discounted back to present value.

P0 = 0.6*(1+0.07) / (1+0.1)  +  0.6*(1+0.07)² / (1+0.1)²  +  [0.6*(1+0.07)²(1+0.04)/(0.1-0.04)] / (1+0.1)²

P0 = 10.99 ≈ 10.98

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