A stock is expected to pay an annual dividend of $5 per share in one year. The dividends are expected to grow at a rate of 2% per year forever. The required rate of return for this stock is 12%
1) What is the current stock price?
2) The company now announces that it is undergoing a restructuring operation and it will suspend its next two dividends (i.e. it will pay the investors nothing) and pay out a new, larger dividend of $5.50 per share at the end of three years, which will then continue to grow by 3% per as before. If the market believes this estimate, what is the new current stock price?
