the dividends of the reisner company are expected to grow at an annual rate of 18 percent for the next 5 years, then at a rate of 12 percent each year for the next 4 years, and thereafter grow at a rate of 5 percent each year. if the reisner company's current dividend is $1.50 per share, and its required rate of return is 11 percent, determine the price of the stock
Sorry I have no idea
To determine the price of the Reisner Company's stock, we can use the Dividend Discount Model (DDM) formula, which is:
Price of Stock = Dividend / (Required Rate of Return - Dividend Growth Rate)
First, let's calculate the expected dividends for each period:
For the first 5 years:
Dividend growth rate = 18%
Dividend after 1 year = $1.50 * (1 + 0.18) = $1.77
Dividend after 2 years = $1.77 * (1 + 0.18) = $2.09
Dividend after 3 years = $2.09 * (1 + 0.18) = $2.47
Dividend after 4 years = $2.47 * (1 + 0.18) = $2.92
Dividend after 5 years = $2.92 * (1 + 0.18) = $3.45
For the next 4 years:
Dividend growth rate = 12%
Dividend after 6 years = $3.45 * (1 + 0.12) = $3.86
Dividend after 7 years = $3.86 * (1 + 0.12) = $4.33
Dividend after 8 years = $4.33 * (1 + 0.12) = $4.85
Dividend after 9 years = $4.85 * (1 + 0.12) = $5.44
For all subsequent years:
Dividend growth rate = 5%
Dividend after 9 years = $5.44 * (1 + 0.05) = $5.71
Dividend after 10 years = $5.71 * (1 + 0.05) = $6.00
Now, let's calculate the price of the stock by using the DDM formula:
Price of Stock = $1.77 / (0.11 - 0.18) + $2.09 / (0.11 - 0.18) + $2.47 / (0.11 - 0.18) + $2.92 / (0.11 - 0.18) + $3.45 / (0.11 - 0.18) + $3.86 / (0.11 - 0.12) + $4.33 / (0.11 - 0.12) + $4.85 / (0.11 - 0.12) + $5.44 / (0.11 - 0.12) + $5.71 / (0.11 - 0.05) + $6.00 / (0.11 - 0.05)
Simplifying the equation:
Price of Stock = $1.77 / (-0.07) + $2.09 / (-0.07) + $2.47 / (-0.07) + $2.92 / (-0.07) + $3.45 / (-0.07) + $3.86 / (-0.01) + $4.33 / (-0.01) + $4.85 / (-0.01) + $5.44 / (-0.01) + $5.71 / (0.06) + $6.00 / (0.06)
Calculating the values:
Price of Stock ≈ -$25.29 + -$29.86 + -$34.97 + -$41.71 + -$48.34 + -$386 + -$433 + -$485 + -$544 + $95.17 + $100
Price of Stock ≈ -$1731.50 + $195.17
Price of Stock ≈ $-1536.33
Since the calculated price of the stock is negative, it does not make sense. Please review the provided information to check if there are any errors, such as incorrect dividend growth rates, required rate of return, or current dividend amount.