Use the following information and the multi-period dividend discount model to find the value of Computech’s common stock. Last year’s dividend was $1.62. The dividend is expected to grow at 12% for three years. The growth rate of dividends after three years is expected to stabilize at 4%. The required return for Computech’s common stock is 15%. Which of the following statements about Computech’s stock is least accurate? A) At the end of two years, Computech’s stock will sell for $20.64. B) Computech’s stock is currently worth $17.46. C) The dividend at the end of year three is expected to be $2.27. D) The dividend at the end of year four is expected to be $2.36. Your answer: A was incorrect. The correct answer was B) Computech’s stock is currently worth $17.46. The dividends for years 1, 2, 3, and 4 are expected to be ($1.62)(1.12) = $1.81; ($1.81)(1.12) = $2.03; ($2.03)(1.12) = $2.27; and ($2.27)(1.04) = $2.36, respectively. At the end of year 3, the stock should sell for ($2.36) / (0.15 – 0.04) = $21.46. At the end of year 2, the stock should sell for ($21.46 + 2.27) / 1.15 = $20.64. The stock should sell currently for ($20.64 + $2.03) / (1.15)2 + ($1.81) / (1.15) = $17.14 + $1.57 = $18.71. I don’t get this one. Once you have calculated the future dividends and the price at the end of year 3, don’t you do the following: ($21.46 + $2.27)/(1.15)^3 + $2.03/(1.15)^2 + $1.81/1.15 = $18.91 ??
hang on, don’t worry, looks like fat finger syndrome on my calculator