The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 17 percent a year for the next 4 years and then decreasing the growth rate to 4 percent per year. The company just paid its annual dividend in the amount of $3.10 per share. What is the current value of one share of this stock if the required rate of return is 8.60 percent

Using 8.60% ROR,we will have current stock of $156.51,option D is correct.

The stock price will be: $109.39

Explanation:

* The stock price will be equal to the sum of present value of:

+ Positive Growth annuity in the next four years;

+ Positive growth perpetuity starting in year 5.

- Calculation of positive Growth annuity in the next four years:

+ Dividend in year 1 = 3.1 x 1.17 = $3.627

+ Present value of the annuity = [ 3.627 / ( 8.6% - 17%) ] x [ 1 - [ (1+17%) / (1+8.6%)]^4 ] = $14.99.

- Calculation of positive growth perpetuity starting in year 5:

+ Dividend in year 5 = 3.1 x 1.17^4 x 1.04 = $6.04;

+ Present value of the perpetuity = [ 6.04 / (8.6% - 4%) ] / 1.086^4 = $94.40

=> Share price = 14.99 + 94.40 = $109.39

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