ABC common stock is expected to have extraordinary growth of 20% per year for 2
ID: 2640392 • Letter: A
Question
ABC common stock is expected to have extraordinary growth of 20% per year for 2 years, at which time the growth rate will settle into a constant 5%. If the discount rate is 16% and the most recent dividend was $3.30, what should be the approximate current share price?
ABC common stock is expected to have extraordinary growth of 20% per year for 2 years, at which time the growth rate will settle into a constant 5%. If the discount rate is 16% and the most recent dividend was $3.30, what should be the approximate current share price?
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Current Share Price = 3.30*(1+20%)/(1+16%)^1 + 3.30*(1+20%)^2/(1+16%)^2 + 3.30*(1+20%)^2*(1+5%)/(1+16%)^2*(16% - 5%) = $40.66
Option B is the correct answer.
Thanks.