Finance Question please help thank you You are considering t

Finance Question: please help, thank you.

You are considering the purchase of a common stock that paid a dividend of $2.00 yesterday. You expect this stock to have a growth rate of 15 percent for the next 3 years, resulting in

dividends of D1=$2.30, D2=$2.645, and D3=$3.04. The long-run normal growth rate after year 3 is expected to be 10 percent (that is, a constant growth rate after year 3 of 10% per

year forever). If you require a 14 percent rate of return, how much should you be willing to pay for this stock?

Solution

One should be willing to pay the intrinsic value or fair price, computed using the present value of dividends

Intrinsic value or fair Price=2.3/1.14+2.645/1.14^2+3.04/1.14^3+(3.04*(1+10%)/(14%-10%))/1.14^3=62.53