Ackert Company's last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price?

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valetta valetta · Answer 1 · 2019-12-01T15:09:51+01:00

Answer:

$37.05

Explanation:

Data provided in the question:

last dividend, D0 = $1.55

Dividend growth rate, g = 1.5% = 0.015

growth rate after 2 year = 8.0% = 0.08

Required rate of return , r= 12% = 0.12

Now,

Year 1 dividend = $1.55 × ( 1 + 0.015 ) = $1.57325

Year 2 dividend = $1.57325 × ( 1 + 0.015 ) = $1.5968

Stock price after year 2 = [ $1.5968 × ( 1 + 0.08) ] ÷ (0.12 - 0.08)

= $43.11

Therefore,

The current stock price = amounts discounted back to the present at the required rate of return

= ( $1.57325 ÷ 1.12 ) + ( 1.5968 ÷ 1.12² ) + ( $43.11 ÷ 1.12² )

= $37.05