Answer:
Current stock price = $33.50
Explanation:
The Dividend Valuation Model(DVM) is a technique used to value the worth of an asset. According to this model, the value of an asset is the sum of the present values of the future cash flows would that arise from the asset discounted at the required rate of return.
Hence we will apply the model as follows:
For a single dividend :
PV = Future dividend × (1+r)^(-n)
Year PV
1 1.25× 1.15^1× 1.11^(-1) =1.295
2 1.25× 1.15^2× 1.11^(-2)= 1.342
3 1.25× 1.15^3× 1.11^(-3)= 1.390
Present of dividend in year 4 and beyond:
This wild determined in two steps as follows:
Step 1 :Present Value in year 3 terms
PV = A × D× (1+r)/(r-g)
(1.25× 1.15^3× 1.06)/(0.11-0.06)=40.30
Step 2 :Present value in year 0
PV in year 0 = 40.30× 1.11^(-3)= 29.469
Current stock price = 1.295 + 1.342 + 1.390+29.469 = 33.496
Current stock price = $33.50
