CX Enterprises has the following expected dividends: $ 1.05 in one year, $ 1.24 in two years, and $ 1.35 in three years. After that, its dividends are expected to grow at 4.1 % per year forever (so that year 4's dividend will be 4.1 % more than $ 1.35 and so on). If CX's equity cost of capital is 11.7 %, what is the current price of its stock?

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Dryomys Dryomys · Answer 1 · 2019-11-11T08:31:41+01:00

Answer:

$16.16

Explanation:

Given that,

Expected dividends:

$1.05 in one year, D1

$1.24 in two years, D2

$1.35 in three years, D3

Growth rate of dividend, g = 4.1%

Equity cost of capital, e = 11.7 %

[tex]P3=\frac{D3(1+g)}{(e-g)}[/tex]

[tex]P3=\frac{1.35(1+0.041)}{(0.117-0.041)}[/tex]

[tex]P3=\frac{1.40535}{0.076}[/tex]

= 18.49

[tex]current\ price=\frac{D1}{(1+e)}+\frac{D2}{(1+e)^{2} }+\frac{D3}{(1+e)^{3} }+\frac{P3}{(1+e)^{3} }[/tex]

[tex]current\ price=\frac{1.05}{(1.117)}+\frac{1.24}{(1.117)^{2} }+[\frac{1.35}{(1.117)^{3} }+\frac{18.49}{(1.117)^{3} }][/tex]

= 0.94 + 0.99 + 14.23

= $16.16