Answer:
option (A) $25.51
Explanation:
Given:
Annual dividend = $2.40
Dividend increase rate, g = 10% = 0.1
Dividend increase rate after 3 years, g' = 2% = 0.02
Required return on stock, r = 12% = 0.12
Now,
Price after 3 years = [tex]\frac{\textup{Annual dividend }\times(1+g)\times(1+g')}{\textup{(r-g')}}[/tex]
= [tex]\frac{\textup{2.40}\times(1+0.1)\times(1+0.02)}{\textup{(0.12-0.02)}}[/tex]
= $26.928
Therefore,
The current value per share = [tex]\frac{\$2.40\times1.10}{(1+0.12)^1} + \frac{\$2.40\times1.1}{(1+0.12)^2} + (\$2.40\times1.1} + \frac{\$26.928}{(1+0.12)^3} )[/tex]
or
The current value per share = $25.51
Hence,
the correct answer is option (A) $25.51