By Jin - 2/6/2013 2:30:29 PM
hello NEAS,
i was reviewing mod-3, and it sure has a lot of materials;
i am stuck on one of the online quiz problem linked directly to the textbook:
K&K Corp. just paid a dividend of $2.00 (DIV0). It is expected to grow at 5% for three years.
Then, it will grow at a constant rate of 2%. If the cost of capital is 8%, what is the current stock price?
although it shows me the solution, i have no idea how to solve it;
i tried to use DCF formula, but have no luck;
can you (NEAS) help me out?
NEAS: The dividend in three years time is $2.00 * 1.05^3 = $2.31525.
The stock price in three years time is $2.31525 * 1.02 / (0.08 - 0.02) = $39.35925The current stock price is $2.00 * 1.05 / 1.08 + $2.00 * 1.05^2 / 1.08^2 + $2.00 * 1.05^3 / 1.08^3 + $39.35925 / 1.08^3 = $36.91744.
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