Red Sun Rising just paid a dividend of $2.61 per share. The company said that it will increase the dividend by 25 percent and 20 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.5 percent. If the required return is 12.1 percent, what is the stock price today?

Question

Rosemary Stewart

Business

27 October, 16:21

Red Sun Rising just paid a dividend of $2.61 per share. The company said that it will increase the dividend by 25 percent and 20 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.5 percent. If the required return is 12.1 percent, what is the stock price today?

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Answers (1)

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Ethen Dyer · Answer 1

The price of the stock today is $43.90

Explanation:

The three stage gordon growth model will be used to calculate the stock price today as the dividend is increasing by two different rate for the next two years after which it will grow by constant rate for which we will calculate the terminal value at the end of the 2 years.

The formula to calculate the price of such a stock is,

P0 = [2.61 * (1+0.25) ] / (1+0.121) + [2.61 * (1+0.25) * (1+0.2) ] / (1+0.121) ² + [ (2.61 * (1+0.25) * (1+0.2) * (1+0.035)) / (0.121 - 0.035) ] / (1+0.121) ²

P0 = $43.896 rounded off to $43.90