Answer:
b. $35.02
Explanation:
The first dividends will be calculate by multiplying by the grow rate and bring them to present value:
first year:
D0 x (1+g)
1.75 x 1.13 = 1.977500
Then we calcualte the present value:
[tex]\frac{Principal}{(1 + rate)^{time} } = PV[/tex]
1.9775/1.12 = 1.7656
second year:
D1 x (1+g)
1.9775 x (1.13) = 1.7656
[tex]\frac{1.7656}{(1 + 0.12)^{2} } = PV[/tex]
PV: 1.7814
Finally,, we calcualte the present value of the next dividends using the dividend grow model
[tex]\frac{divends}{return-growth} = Intrinsic \: Value[/tex]
We calcualte next year dividneds:
D2 x (1+g) = D3
1.9775 x 1.06 = 2.368650
g = 6%
and return 12%
[tex]\frac{2.36865}{0.12-0.06} = Intrinsic \: Value[/tex]
39.47749167
then, we calcualte the present vale:
[tex]\frac39.47749167}{(1 + 0.12)^{2} } = PV[/tex]
PV = 31.4712
Finally, we add all these values
1.7656 + 1.7814 + 31.4712 = 35,0182 = 35.02
This will be the estimate current stock price.
