Question

Burke Tires just paid a dividend of D 0 = ₱ 1.32. Analysts expect the company's dividend to grow by 30%
this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this
low-risk stock is 9.00%. What is the best estimate of the stock’s current market value?

Answer 1

$D_{0} = 1.32$

$D_{1}= 1.32 \times1.30 = 1.76, D_{2} = 1.76 \times1.10=1.936$

now $D_{3} =1.936\times1.05= 2.0328$

constant growth rate $=5\%$

required return $=9\%$

$P_{2} = \frac{D_{3}}{r-g} = \frac{2.0328}{0.09-0.05}=\$50.82$

$P_{0}=\frac{1.76}{1.09}+\frac{50.82}{1.09^{2}}= 1.6147 +42.7742 = \$44.39$