Answer :
Answer:
$26.64
Explanation:
Dividend growth rate for years 1 to 3 = 27.58%
Year 1 dividend = current dividend * (1 + growth rate) = 1.36 * 1.2758 = 1.7351
Year 2 dividend = 1.7351 * 1.2758 = 2.2136
Year 3 dividend = 2.2136 * 1.2758 = 2.8241
From year 4 onward, growth rate is constant at 4%. Therefore, using the PV of an annuity formula, the PV (in year 4) of the future dividends will be
[tex]PV=\frac{D(1+g)}{r-g} \\PV=\frac{2.8241(1.04)}{0.1256-0.04} \\[/tex]
PV of dividends from year 4 onward = 34.3115.
Therefore, the value of the stock
[tex]V=\frac{D_{1}}{(1+r)^{1} } +...+\frac{D_{4}}{(1+r)^{4} }\\V=\frac{1.7351}{(1.1256)^{1} }+\frac{2.2136}{(1.1256)^{2} }+\frac{2.8241}{(1.1256)^{3} }+\frac{34.3115}{(1.1256)^{4} }[/tex]
Therefore the value of the stock = $26.64.