Question

Joven Corp. is a young start-up company and therefore is not paying any dividends on the stock over the next 7 years. The company will start paying a $6 per share dividend at the end of year 8 and thereafter it will increase the dividends by 2% per year forever. If the required rate of return on this stock is 10%, what is the current (today’s) share price?

Answer 1

Answer:

$38.49

Explanation:

The current stock price =Dividend in year 8 / (1 + required rate of return)^8 + [1 / ( 1 + required rate of return)^8 x [Dividend in year 8*(1 + growth rate) / ( required rate of return - growth rate )]

The current stock price = $6 / 1.108 + 1 / 1.108 *  ($6*(1 + 0.02)/(0.10 - 0.02)]

The current stock price = $38.49 approximately.