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

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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

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