Brickhouse is expected to pay a dividend of $3.15 and $2.46 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.9 percent. What is the stock price today if the required return is 11.3 percent?

$32.70

Explanation:

According to the dividend discount model, the value of the stock today is the present value of the dividends to be paid plus the present value of the value of the dividend from when the company starts maintaining a stable growth rate which in this question in year 2.

= (Year 1 Dividend / ( 1 + r)) + (Year 2 Dividend / ( 1 + r)²) + (value at year 2 / ( r - g))

Value at year 2 = Year 3 dividend / ( required return - growth rate)

= ( Year 2 dividend * (1 + g)) / ( required return - growth rate)

= (2.46* ( 1 + 0.039)) / ( 0.113 - 0.039)

= $34.54

Value today = (Year 1 Dividend / ( 1 + r)) + (Year 2 Dividend / ( 1 + r)²) + (value at year 2 / ( r - g))

= 3.15/1.113 + 2.46/1.113² + 34.54/1.113²

= 2.83 + 1.99 + 27.88

= $32.70