# Answer to Question #41648 in Finance for TARA

Question #41648
McGonigal’s Meats, Inc. currently pays no dividends. The firm plans to begin paying dividends in 3 years (at the end of t3). The first dividend at that time will be \$1 and dividends are expected to grow at 5% per annum thereafter. Given shareholders demand a 12% return on their investments, what is the price of the stock today (t0)?
1
2014-04-24T11:00:59-0400
Generally, investors buy common stocks for two reasons. Many stocks offer a cash dividend, and they also have the potential to provide a capital gain. In this publication, we will present a method for calculating stock prices based on a constant growth model, leveraging a discounted cash flows approach which considers both dividends and capital gains.
Expected Return = (Dividends Paid + Capital Gain) / Price of Stock
This expected return for a stock is also known as the market capitalization rate or discount rate. We&#039;re going to use all three terms interchangeably throughout our calculations and explanations in this article. Let&#039;s look at a quick example of how this formula works.
P(t3) = 1(1.05)/(0.12-0.05) = 15
P(t0)= (15+4)/1.12^3 = \$13.52

Need a fast expert's response?

Submit order

and get a quick answer at the best price

for any assignment or question with DETAILED EXPLANATIONS!