A firm paid a dividend of 750 yesterday Dividend will grow a

A firm paid a dividend of $7.50 yesterday. Dividend will grow at a rate of 24.0% per year for 2 years and then a rate of 5.0% per year thereafter. An annual rate of 18.0% is expected on the investment. If you hold onto the stock indefinitely, what is the most you would pay for this stock now? Show work

Solution

Hi,

Please find the detailed answer as follows:

Current Price = 7.50*(1+.24)/(1+.18)^1 + 7.50*(1+.24)^2/(1+.18)^2 + 7.50*(1+.24)^2*(1+.05)/(1+.18)^2*(.18 -.05) = $83.06

Answer is $83.06.

Thanks.