Determining stock price?
ABC Corporation has just paid a dividend of $5. It is expected to pay an ANNUAL dividend, which grows at a constant rate of 2% for 3 years and stays flat thereafter. What should be the price of ABC stock if investors require a return of 8% per year on ABC stock?
I think I have to figure out the value for the first 3 years, and then figuring out what the value would be if it was just the constant dividend with no growth, and subtract the first 3 years of that and then add the first 3 years with growth.
I ended up getting $102.69 for my stock price, but I think I messed up. Thanks in advance for anyone that can help.
- PrivateBankerLv 77 years agoFavorite Answer
First, figure out your dividends....
D1 = $5(1.02) = 5.10
D2 = 5.10(1.02) = 5.202
D3 = 5.202(1.02) = 5.30604
D4 = 5.30604
Price in year 4 = D3 / 0.08 = 5.30604/0.08 = 66.3255
Total cash flow year 3 = D3 + P3 = 5.30604 + 66.3255 = 71.63154 <call this CF3
Now discount all the cash flows...D1/(1.08) + D2/1.08^2 + CF3 /1.08^3
= 66.04552, round to $66.05