Question

Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12% (for both stages). Using the multistage DDM, the stock should be worth __________ today. Group of answer choices

Answer 1

Answer:

$67.95

Explanation:

Calculation to determine how much should the stock should be worth today.

First step is to calculate the dividend per year;

D4= D3(1+g) = 4(1.07) = $4.28

Second step is to calculate the PV of each dividend

PV (D1) =2 / (1.12)

PV (D1) = 1.7857

PV (D2) = 3/ (1.12²)

PV (D2) = 2.3916

PV (D3) = 4/ (1.12³)

PV (D3) = 2.8471

Fourth Step is to calculate the Value of Perp. at t=3

=[(4(1.07))/(.12-.07)]/1.12^3

=85.6/1.4049

=60.9296

Now let calculate how much should the stock should be worth today

Worth today = 1.7857+ 2.3916 + 2.8471 + 60.9296

Worth today=$67.95

Therefore Using the multistage DDM, the stock should be worth $67.95 today