Question #145200

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?

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?

Expert's answer

"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"

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