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your company is estimated to make dividends payments of $2.3 next year, $3.4 the year after, and $4.5 in the year after that. the dividends will then grow at a constant rate of 6% per year. if the discount rate is 12% then what is the current stock price?

Answer :

If the discount rate is 12% then the current stock price is $73.16

Given,

Dividends payments - $2.3

Constant rate - 6% per year

Discount rate - 12%

Current stock price - ?

Stock price

Price of the stock = Present value of CFs from it.

Price after 3 Years = D4 / [Ke - g] D4 - Dividend after 4 Years

PV of dividend in year 1 = 3.4× 1.12× 1.0845^(-1)=3.654

PV of dividend in year 2 =  3.4× 1.12^2× 1.0845^(-2) = 3.942

Step 1- PV in year 2 terms

3.4× 1.16^2× 1.05/(0.0845- 0.05)= 62.21

Step 2- PV in year 0

62.21 × 1.0845^(-2)= 73.16

Hence, if the discount rate is 12% then the current stock price is $73.16

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