Analysts predict that Smith Inc will pay dividends of $3 per share in year 1, $3.5 per share in year 2, and $3.8 per share in year 3. The firm then expects its dividend to increase by 5% per year for three years (year 4, 5, 6). Thereafter the dividends will decrease at 6% indefinitely. The required rate of return is 12%. What is the value of the stock today?
Added by Malik J.
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For year 1, the present value of the dividend is $3 / (1 + 0.12) = $2.68. For year 2, the present value of the dividend is $3.5 / (1 + 0.12)^2 = $2.79. For year 3, the present value of the dividend is $3.8 / (1 + 0.12)^3 = $2.69. Show more…
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