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Today's Price for a Stock

Next years dividend for ERT stock is expected to be $4.00. You expect it to be $4.00 in 2 years, also, but then you expect it to grow at an 8% annual rate forever. The required rate of return for years t=0 through t=2 is .20. The required rate of return for year t=3 onward is .25. What is the price of the stock today?

Solution Preview

The dividend stream is made up of two components:
1. The first two years (year 1 and year 2) at $4.00 per year.
2. The constant growth rate which starts in year 3.

The dividends for the ...

Solution Summary

This solution calculates the price of a stock based on dividends, growth rates and required rates of return in about a paragraph with worded explanation included.

$2.19