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Sagot :
Answer:
$14.85
Explanation:
The computation of the price of the stock today is shown below
But before that following calculation need to be done
D1 i.e.next year's dividend is
= D0(1+g)
= 1.50(1.07)
= 1.605
Now growth rate is
= 7 % - 2%
= 5% or 0.05
D2 i.e. dividend year 2 is
= D1(1+g)
= 1.605(1.05)
= 1.6853
Now
growth rate is
= 5% - 2%
= 3% or 0.03
Terminal Cashflow; D3 is
= 1.6853 (1.03)
= 1.7359
Now the present value for each dividend would be
PV(D1) is
= 1.605 ÷ (1.14 )
= 1.4079
PV(D2) is
= 1.6853 ÷ (1.14^2 )
= 1.2968
PV of terminal cash flow (D3) is
= 1.7359 ÷ (14% - 3%) ÷ (1.14)^2
= 12.1429
And, finally the price of the stock today is
= $1.4079 + $1.2968 + $12.1429
= $14.848
= $14.85
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