Daniel Custom Cycles' common stock currently pays no dividends. The company plans to begin paying dividends beginning 3 years from today. The first dividend will be $3.00 and dividends will grow at 5 percent per year thereafter. Given a required return of 15 percent, what would you pay for the stock today?

Question

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DeniceSandidge DeniceSandidge · Answer 1 · 2019-08-09T12:52:30+02:00

Answer:

stoke price in 2 year is $30

current stoke price is $22.68

Explanation:

Given data

dividend in 3 year = $3.00

grow rate = 5% = 0.05

return = 15% = 0.15

to find out

pay for the stock today

solution

we know there is no dividends for first 3 year after they need to pay

so first we calculate stoke price in 2 year from this formula i.e.

stoke price = dividend in 3 year / ( return rate - grow rate )

put these value

stoke price = 3 / ( 0.15 - 0.05 )

stoke price in 2 year is $30

now we calculate current price for stoke by discounting stoke in 2 year by this formula to 2 year

current stoke price = stoke price in 2 year / (1 + return rate )²

current stoke price = 30 / (1 + 0.15 )²

current stoke price is $22.68