HakunaMatata has common stock that is expected to grow at a rate of 17% over the next year. After this first year, it will stabilize to a 2% long-term growth rate. If the dividend just paid (D0) was $1.07 and the required rate of return on the stock is 7%, what is the value of the stock today (to 2 decimals) ?

The value of the stock today is $25.04

Explanation:

The value or price of stock today can be calculated using the two stage growth model of Dividend Discount Model approach. This model bases the value of a stock on the present value of the expected future dividends of the stock. The price of this stock under the two stage growth model will be calculated as follow,

P0 = 1.07 * (1+0.17) / (1+0.07) + [ (1.07 * (1+0.17) * (1+0.02) / (0.07-0.02)) / (1+0.07) ]

P0 = $25.038 rounded off to $25.04