Given the following information, calculate the current value of the stock: current dividend is $3.00, projected super normal growth for three years at 20%, growth rate after year 3 should remain constant at 11% and you want to earn a 16% annual return. What should you pay for the stock? A.$67.55 B.$83.34 C.$74.39 D.$61.46

1 answer
Question:

Given the following information, calculate the current value of the stock: current dividend is $3.00, projected super normal growth for three years at 20%, growth rate after year 3 should remain constant at 11% and you want to earn a 16% annual return. What should you pay for the stock?
A.$67.55
B.$83.34
C.$74.39
D.$61.46

Answers

Answer:B. $83.34Explanation:Current Dividend (D0) = $3.00Super Normal growth for next three years (g1) = 20% = 0.20Growth Rate after three year (g2) = 11% = 0.11Required rate of Return (r) = 16% or 0.16P3 = D4/(r-g2) = D0*(1+g1)^3*(1+g2)/(r-g2)P3 = $3.00*(1+0.20)^3*(1+0.11)/(0.16-0.11)P3 = $115.0848Value of Share (P0) = [D1/(1+r)] + [D2/(1+r)^2] + [D3/(1+r)^3] + [P3/(1+r)^3]Value of Share (P0) = [D0*(1+g1)/(1+r)1] + [D0*(1+g1)^2/(1+r)^2] + [D0*(1+g1)^3/(1+r)^3] + [P3/(1+r)^3]Value of Share (P0) = [$3.00*(1+0.20)/(1+0.16)^1] + [$3.00*(1+0.20)^2/(1+0.16)^2] + [$3.00*(1+0.20)^3/(1+0.16)^3] + [$115.0848/(1+0.16)^3]Value of Share (P0) =  $3.10 + $3.21 + $ 3.32 + $73.72Value of Share (P0) = $83.34

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