question archive MMM company has the following expected dividends: $2 in one year, $2
MMM company has the following expected dividends: $2 in one year, $2
Subject:AccountingPrice:2.86 Bought3
MMM company has the following expected dividends: $2 in one year, $2.35 in two years, and $3.25 in three
years. After that, its dividends are expected to grow at 3% per year forever (so that year 4's dividend will be
3% more than $3.25 and so on). If MMM equity cost of capital is 11%, what is the current price of its stock?
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D1= $2
D2 = $2.35
D3= $3.25
Value after year 3=(D3*Growth rate)/(Equity cost of capital-Growth rate)
=(3.25*1.03)/(0.11-0.03)
=$41.84375
Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)
=2/1.11+2.35/1.11^2+3.25/1.11^3+41.84375/1.11^3
=$36.68(Approx).
