Question

Tony Company has just paid annual dividend of $1.00. Tony’s growth rate is expected to be a constant 10 percent for 2 years, after which dividends are expected to grow at a rate of 20 percent forever. Given the 30 percent discount rate. What is the current price of Tony’s common stock?

Answer 1

Answer:

Current price = $10.15

Explanation:

Given data:

Annual dividend $1.00

growth rate 10% for 2 year then 20%

Therefore,

1st Year dividend = 1 * 1.1 = 1.1

2nd Year dividend = 1.1 * 1.1 = 1.21

3rd Year dividend $D_3 = 1.21 * 1.2 = 1.452$

Value at year 2 $= \frac{D_3}{required\ rate - growth\ rate}$

Value at year 2 $= \frac{1.452}{0.3 - 0.2}$

Value at year 2 $= \frac{1.452}{0.1}$

Value at year 2 = 14.52

Current price $= \frac{1.1}{(1 + 0.3)^1} + \frac{1.21}{(1 + 0.3)^2} + \frac{14.52}{(1 + 0.3)^2}$

Current price = $10.15