Answer:
Estimated current stock price is $46.84
Step-by-step explanation:
First we have to find the value of dividend payment [tex]t_1, t_2 \& t_3[/tex]
Given [tex]D_0=$1.75[/tex]
Yearly growth rate for next 2 years( [tex]g_1[/tex] )=38.00%
[tex]D_1=\$1.75\times 1.38=\$2.42[/tex]
[tex]D_2=\$2.42\times1.38=\$3.34[/tex]
Growth after two years will 6% indefinitely
[tex]g_2=6\%=\dfrac{6}{100}=0.06[/tex]
[tex]D_3=\$3.34\times1.06=\$3.54[/tex]
Estimate of current stock price is
[tex]=\dfrac{D_1}{(1+r)}+\dfrac{D_2}{(1+r)^{2}}+\dfrac{\dfrac{D_3}{(r-g_2)}}{(1-r)^{3}}[/tex]
[tex]=\dfrac{\$2.42}{(1.12)}+\dfrac{\$3.34}{(1.12)^{2}}+\dfrac{\dfrac{\$3.54}{(0.12-0.06)}}{(1.12)^{3}}[/tex]
=$46.84
Estimate of current stock price is =$46.84
