Piedmont Enterprises currently pays a dividend of $1 per share. This d

QUESTION

Piedmont Enterprises currently pays a dividend of $1 per share. This dividend is expected to grow at a 20 percent per year rate for the next two years, after which it is expected to grow at 6 percent per year for the foreseeable future. If you require a 15 percent rate of return on an investment of
Stock is expected to sell for $ 20.19 at the begining of year 5. Stock pays dividend as below taking the consideration growth rate as given in the question” Current = $ 1 Year 1 = $ 1.20 (i.e. 1 20%) Year 2 = $ 1.22 (i.e. 1.20 20%) Year 3 = $ 1.5264 (i.e. 1.44 6%) Year 4 = $ 1.6179 (i.e. 1.5264 6%) Year 5 =

$ 1.7150 (i.e. 1.6179 6%) Year 6 = $ 1.8179 (i.e. 1.7150 6%) Using dividing of year 6, we use the formula P= Dn/Rs-g to find the price of stock at year 5 so, P = 1.8179/(0.15 0.06) = 1.8179/0.09 = $20.19

ANSWER:

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