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Non constant growth stock

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Please help with the following problem.

The dividend per share in one year is $2. In year two it is $4 a share. Then the dividend will grow at 5% per year after that. The expected rate of return is 12%.

a What is the current stock price?
b. What is the expected price of the stock in one year?
c. The expected return of 12% equals dividend yield plus capital appreciation

Please show formula and calculation in simple terms.

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Solution Summary

The solution explains how to calculate the stock price for a non constant growth stock

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The dividend per share in one year is $2. In year two it is $4 a share. Then the dividend will grow at 5% per year after that. The expected rate of return is 12%.

a What is the current stock price?

The current price of stock is the present value of the dividends. The dividends will grow at a constant rate from year 3 onwards. When the dividends grow at a constant rate, we can use the constant growth formula to get the present value. Since the constant growth is from year ...

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