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Ace Frisbee Corporation produces a good that is very mature in their product life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3.00, a dividend in year 2 of $2.00, and a dividend in year 3 of $1.00. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the stock should be worth __________ today.

Respuesta :

Answer:

$13.07  

Explanation:

The price of the company's stock today is the present value of the company's dividends payment as well as the terminal value of dividends after year 3.

Terminal value=year 3 dividend*(1+g)/r-g

r is the required rate of return of 8%

g is the declining rate of dividend of 2%

terminal value=$1*(1-2%)/(8%-(-2%)=$1*0.98/0.10=$9.8

Present of dividends=$3/(1+8%)+$2/(1+8%)^2+$1/(1+8%)^3+$9.8/(1+8%)^3=$13.07  

Note that the discount factor in year 3 which 1/(1+8%)^3 was also applied to the terminal value

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