Question

A stock you are interested in paid a dividend of $1 last year. The anticipated growth rate in dividends and earnings is 25% for the next 2 years before settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of the stock.

Answer 1

Answer:

The stock price is P=$ 25,79

Explanation:

There are 2 stages

1°) 2 periods of dividend growth rate of 25%

2°) the remaining periods (infinite number of periods) of dividend growth rate of 5%.  We use the Gordon stock price model to obtain the result.

The explanation can be found in the attached picture