A7X Corp. just paid a dividend of $2.80 per share. The dividends are expected to grow at 20 percent for the next eight years and then level off to a growth rate of 5 percent indefinitely. If the required return is 13 percent, what is the price of the stock today?

A7X Corp. just paid a dividend of $2.80 per share. The dividends are expected to grow at 20 percent for the next eight years and then level off to a growth rate of 5 percent indefinitely. If the required return is 13 percent, what is the price of the stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Stock price

$

 

Explanation:

We can use the two-stage dividend growth model for this problem, which is:

P0 = [D0(1 + g1) / (R − g1)]{1 − [(1 + g1) / (1 + R)]t} + [(1 + g1) / (1 + R)]t[D0(1 + g2) / (R − g2)]

P0 = [$2.80(1.20) / (.13 − .20)][1 − (1.20 / 1.13)8] + [(1.20) / (1.13)]8[$2.80(1.05) / (.13 − .05)]

P0 = $89.08