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CHEGG Commonwealth Bike Lane Gear Hut is expected to pay a $4 dividend at the end of Year 2 and a $5 dividend at the end of Year 3. At the end of Year 4, you expect it to pay a $6 dividend and that the dividend will grow at 2 % after that. If CBLGH’s equity cost of capital is 17%, what would you expect to pay for the stock today?

Answer :

Shahzaibfaraz

Answer:

The maximum price that should be expected for the stock today is $31.02

Explanation:

The price of the stock today can be calculated using the dividend discount model. It bases the price or value of a stock on the present value of the expected future dividends from the stock.

The price of the stock today is,

P0 = 4/(1+0.17)^2  +  5/(1+0.17)^3  +  6/(1+0.17)^4  +  

[ (6 * (1+0.02)) / (0.17 - 0.02) ] / (1+0.17)^4

P0 = $31.0187 rounded off to $31.02

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