The three amigos just paid an annual dividend of $.60 per share but plans to double that amount each year for three years. after that, the firm expects to maintain a constant dividend. what is the value of this stock today if the required return is 15 percent?

Ans. The value of this stock today is $27.05

Explanation:

Hi, we have to bring to present value all future dividends of the relevant period of time (that is all 3 year dividends), the horizon period (I mean, from year 4 and beyond) we need to use another formula, which we will also bring to present value.

For the first 3 years, the formula is as follows.

Where r is the discount rate (in our case, 0.15 or 15%), n is the year where the dividend takes place.

For the horizon value, since there is no growth rate from there, the formula is:

We have to bring it to present value (this formula provides the value in year 3 of all future dividends from year 4 and beyond), so the complete formula is:

Now, the whole calculation should look like this:

So, the value of this stock today if the required return is 15 percent is $27.05

Best of luck

c.

clarify customers’ doubts only when asked.

the correct answer is - no.

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