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What price should the stock of ABC company be selling for today?

One year ago ABC Company paid a $4.00 dividend, and, during the current year, it has experienced a 10 percent growth rate. Due to a new, advance production technique, ABC expects to achieve a dramatic increase in its short-run growth rate -- 25 percent annually for the next 3 years. After this time, growth is expected to return to the long-run constant rate of 10 percent, and investors require a 15 percent rate of return.

At what price should the stock of ABC Company be selling for today? Assume that a dividend of $4.40 has just been paid, i.e., that D0=$4.40.

P0 = D1 + D2 + D3 + D4 + Dn + 1
_______ _________ __________ _________ __________
(1 + Ke) (1 + Ke)^2 (1 + Ke)^3 (1 + Ke)^4 Ke - Gc

= $4.40(1.10) + $4.85(1.25) + $6.05(1.25) + $7.56(1.25) + $9.45 (1.10)
__________ __________ ___________ ___________ ____________
(1.15) (1.15)^2 (1.15)^3 (1.15)^4 .15 - .10

= $4.20 + $4.57 + $4.97 + $5.40 + $2.08

PV = $21.22 Answer ?????

Dividends Payout: ?????
D-1 =$4.00 , D0 = $4.40, D1 = $4.84, D2 = $6.05, D3 = $7.56, D4 = $9.45.

Solution Preview

Hello!
We have that a dividend of $4.40 (10% higher than the initial dividend of $4.00, representing the 10% growth in the past year) has just been paid. The next dividend will happen one year from now, and it will be 25% higher: 4.40*1.25 = $5.50. This growth ...

Solution Summary

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$2.19