question archive Robotic Atlanta Inc
Robotic Atlanta Inc
Subject:FinancePrice:2.87 Bought7
Robotic Atlanta Inc. just paid a dividend of $4.00 per share (that is, D0 = 4.00). The dividends of Robotic Atlanta are expected to grow at a rate of 20 percent next year (that is, g1 = .20) and at a rate of 10 percent the following year (that is, g2 = .10). Thereafter (i.e., from year 3 to infinity) the growth rate in dividends is expected to be 5 percent per year. Assuming the required rate of return on Robotic Atlanta stock is 17 percent, compute the current price of the stock. (Round your answer to 2 decimal places and record your answer without dollar sign or commas).
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Answer:
Dividend in year 1 = 4*1.2 = 4.8
Diviend in year 2 = 4.8*1.1 = 5.28
Diviend in year 3 = 5.28*1.05 = 5.544
We can use the Dividend Growth Model formula:
P2 = D3/(r-g)
P2 = 5.544/(0.17-0.05) = 46.2
We have to discount this to the present value at year 0.
P0 = 46.2/(1.17)^2 = 33.75
