rockwell corp just paid a dividend of .50. analysts expect their dividends to increase by 7% every year for the next 3 years, and then have a constant dividend growth rate of 2% after year 3. If your required return is 8% what is the present value of the stock?

Price of share today = $9.74

Explanation:

The price of a share can be calculated using the dividend valuation model  

According to this model the value of share is equal to the sum of the present values of its future cash dividends discounted at the required rate of return.  

If dividend is expected to grow at a given rate , the value of a share is calculated using the formula below:  

Price=Do (1+g)/(k-g)  

Do - dividend in the following year, K- requited rate of return , g- growth rate  

Step 1 : PV of dividend from year 1 to 3

PV = D × (1+r)^(-n)

D- dividend receivable in a particular year, r- required rate of return, n- year

Year                                          PV of Dividend

1         0.50 × 1.07^1 ×1.08^(-1)   =   0.495

2         0.50 × 1.07^2 ×1.08^(-2) =  0.491

3         0.50× 1.07^3× 1.08^(-3) =    0.486

Step 2 : PV of dividend from year 4 to infinity

PV (in year 3 terms) of dividend= 0.50× 1.07^3 ×1.02/(0.08-0.02) = 10.41

PV in year 0 terms = 10.41  × 1.08^(-3) = 8.27

Total Present Value = 0.495 + 0.491  + 0.486 + 8.27  =  9.738

Price of share today = $9.74

i guess you could put raise the economic balance

answer(d) all of the choices are correct;