The last dividend paid by Wilden Corporation was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 6.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price?

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AFOKE88 AFOKE88 · Answer 1 · 2021-07-10T03:06:30+02:00

Answer:

Net present value= $25.17

Step-by-step explanation:

We are told that The last dividend paid was $1.55 and that the dividend growth rate is constant at 1.5% for 2 years.

Thus;

1) After 1st year;

1.55 × (1 + 0.015) = 1.57325 Div1

After 2nd year;

1.57325 × (1 + 0.015) = 1.59685 Div2

After that 2 years it grows at 6% Constant rate forever;

1.59685 × (1 + 0.06) = 1.69266 Div3

Let's now use the dividend formula which grows in perpetuity at a rate of "g" since required return is 12%:

Thus;

V = 1.69266/(0.12 - 0.06) = 28.211

Thus; Div2 = 28.211 + 1.59685 ≈ 29.80785

Now, using the financial calculator of the Cash Flow function, we have:

Div0 = 0

Div1 = 1.57325

Div2 = 29.80785

i% = 12

Net present value = (1.57325/(1 + 0.12)) + ((1.59685 + 28.211)/(1 + 0.12)²)

Net present value= $25.17