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Cellular Systems paid a $3 dividend last year. The dividend is expected to grow at a constant rate of 5 percent over the next two years. The required rate of return is 12 percent (this will also serve as the discount rate in this problem). Round all values to three places to the right of the decimal point where appropriate.

a. Compute the anticipated value of the dividends for the next three years. That is, compute D1' D2' and D3'; for example, D1 is $3.15 ($3.00 1.05). Round all values throughout this problem to three places to the right of the decimal point.

b. Discount each of these dividends back to the present at a discount rate of 12 percent and then sum them.

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Solution Summary

Calculates stock price by discounting dividends.