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28 April, 12:20

The Connors Company's last dividend was $1.00. Its dividend growth rate is expected to be constant at 15% for 2 years, after which dividends are expected to grow at a rate of 10% forever. Connors' required return (rs) is 12%. What is Connors' current stock price?

a. $56.82

b. $58.15

c. $62.87

d. $60.07

e. $54.91

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  1. 28 April, 12:22
    0
    The price of the Stock today is $60.07. So option D is the correct answer.

    Explanation:

    The stock price of a company's stock whose dividends grow at two different growth rates can be calculated using the two stage Gordon growth model also known as the two stage DDM.

    The short term growth rate or the growth rate that is for a limited time period is taken as g1. So, g1 is 15%

    The sustainable growth rate which is the growth rate that will prevail forever is taken as g2. So, g2 is 10%

    The price of the stock today is,

    P0 = 1 * (1+0.15) / (1+0.12) + 1 * (1+0.150^2 / (1+0.12) ^2 +

    [ (1 * (1+0.15) ^2 * (1+0.1) / (0.12 - 0.1)) / (1+0.12) ^2 ]

    P0 = $60.067 rounded off to $60.07
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