Red Sun Rising just paid a dividend of $2.43 per share. The company said that it will increase the dividend by 15 percent and 10 percent over the next two years, respectively. After that, the company is expected to increase its annual dividend at 4.1 percent. If the required return is 11.5 percent, what is the stock price today

P0 = $39.76

Explanation:

The dividend discount model or DDM can be used to calculate the price of the share today. The DDM values a stock based on the present value of the expected future dividends from the stock. The price of this stock under this model can be calculated as follows,

P0 = D0 * (1+g1) / (1+r)  + D0 * (1+g1) * (1+g2) / (1+r)^2  +  

[ (D0 * (1+g1) * (1+g2) * (1+g3) / (r - g3)) / (1+r)^2 ]

Where,

P0 = 2.43 * (1+0.15) / (1+0.115)  +  2.43 * (1+0.15) * (1+0.1) / (1+0.115)^2  +

[ (2.43 * (1+0.15) * (1+0.1) * (1+0.041) / (0.115 - 0.041)) / (1+0.115)^2 ]

P0 = $39.76

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