Dambo Inc Just paid a dividend of 270 price of this stock to

Dambo Inc Just paid a dividend of $2.70 price of this stock today? (Points 5) e company expects a super growth of 6% tor the first 4 years and expect to grow at a constant rate of 3% atter that IF the current Ke 1s 6 5% what is the expected ? 100.31 O 104.52 O 67.59 88.65 92.69

Solution

Recent Dividend, D0 = $2.70

Growth rate for next 4 years is 6%, followed by a constant growth rate (g) of 3%

D1 = $2.700 * 1.06 = $2.862
D2 = $2.862 * 1.06 = $3.034
D3 = $3.034 * 1.06 = $3.216
D4 = $3.216 * 1.06 = $3.409
D5 = $3.409 * 1.03 = $3.511

Required Return, ke = 6.5%

P4 = D5 / (ke - g)
P4 = $3.511 / (0.065 - 0.03)
P4 = $3.511 / 0.035
P4 = $100.314

P0 = $2.862/1.065 + $3.034/1.065^2 + $3.216/1.065^3 + $3.409/1.065^4 + $100.314/1.065^4
P0 = $88.65

So, current price of this stock is $88.65