Blue Packaging Company (BPC) expects to pay a dividend of $1.28 in exactly one year. BPC has recently invested in multiple wealth increasing projects and expects its operating cash flow to increase dramatically for a few years. BPC expects a dividend growth rate of 50% during years 2, 3, and 4. After that high growth period, a normal growth rate of 3.1% will occur. BPC shareholders require a 14.7% return. The value of BPC stock is closest to:

$29.16

Explanation:

Present value (PV) of year 1 dividend = $1.28 / (1.147)^1 = $1.11595466434176

Year 2 dividend = $1.28 * 1.5 = $1.92

PV of year 2 dividend = $1.92 / (1.147)^2 = $1.4594001713275

Year 3 dividend = $1.92 * 1.5 = $2.88

PV of year 3 dividend = $2.88 / (1.147)^3 = $1.90854425195401

Year 4 dividend = $2.88 * 1.5 = $4.32

PV of year 4 dividend = $4.32 / (1.147)^4 = $2.49591663289539

Price at year 4 = (4.32 * 1.031) / (0.147 - 0.031) = $38.39586206896550  

PV of price at year 4 = $38.39586206896550 / (1.147)^4 = $22.1835349009927

Current price = $1.11595466434176 + $1.4594001713275 + $1.90854425195401 + $2.49591663289539 + $22.1835349009927 = $29.16

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