Brickhouse is expected to pay a dividend of $3.10 and $2.44 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.8 percent. What is the stock price today if the required return is 11.2 percent

The answer is $32.44

Explanation:

Solution

Given that:

Expected dividend = $3.10 and $2.44

Increase in annual dividend = 3.8%

The required return rate = 11.2%

Now what is the stock price as at today

Thus

The Present Value of Dividends = $ 3.10 * 1/(1.112) ^ 1 + $ 2.44 * 1/(1.112) ^ 2

= $4.76101133

The Price at Year 2 = Expected Dividend / ( Required Rate of Return - Growth Rate)

= ( 2.44 * 1.038) / ( 11.2% - 3.8%)

= $34.2259459459

So,

The Present Value of Price at Year 2 becomes:

= Price at Year 2 * 1/(1.112) ^ 2

= $34.2259459459 * 1/(1.112) ^ 2

= $27.67871256

Then,

The Current Price = Present Value of Price at Year 2 + Present Value of Dividend

= 27.67871256 + 4.76101133

= $32.44

Therefore the stock price today is $32.44