# A stock is expected to pay no dividends for the first three years. Assuming the stock is fairly priced, what is the current price of the stock?

A stock is expected to pay no dividends for the first three years, i.e., D1 = $0, D2 = $0, and D3 = $0. The dividend for Year 4 is expected to be $5.00 (i.e., D4 = $5.00), and it is anticipated that the dividend will grow at a constant rate of 8 percent a year thereafter. The risk-free rate is 4 percent, the market risk premium is 6 percent, and the stock's beta is 1.5. Assuming the stock is fairly priced, what is the current price of the stock?

Student response: Correct

a.$ 69.31

b.$ 72.96

c.$ 79.38

d.$ 86.38

e.$100.00

https://brainmass.com/business/dividends-stock-repurchase-and-policy/stock-expected-pay-dividends-first-three-years-55793

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A stock is expected to pay no dividends for the first three years, i.e., D1 = $0, D2 = $0, and D3 = $0. The dividend for Year 4 is expected to be $5.00 (i.e., D4 = $5.00), and it is anticipated that the dividend will grow at a constant rate of 8 percent a year thereafter. The ...

#### Solution Summary

The expert examines a stock which is expected to pay no dividends for the first three years.