Sew 'N More just paid an annual dividend of $1.42 a share. The firm plans to pay annual dividends of $1.45, $1.50, and $1.53 over the next 3 years, respectively. After that time, the dividends will be held constant at $1.60 per share. What is this stock worth today at a discount rate of 9 percent

The stock is worth $17.50 per share today

Explanation:

The price per share today can be calculated using the DDM where expected dividends are discounted back to present value to calculate the share price. When the dividend growth becomes zero, we will calculate the terminal value at the end of Year 3 and discount it back too. The formula for price of the stock today is,

P0 = D1 / (1+r)  +  D2 / (1+r)^2  +  D3 / (1+r)^3  +  [ (D4 / r) / (1+r)^3]

P0 = 1.45 / (1+0.09)  +  1.5 / (1+0.09)^2  +  1.53 / (1+0.09)^3  +  

[ (1.6 / 0.09) / (1+0.09)^3]

P0 = $17.50

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