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Answer :
The value of BPC stock is closest to $45.46.
The formula to calculate the dividend growth rate is as follows: Dividend Growth Rate = ((Dividend per Share in Current Year - Dividend per Share in Previous Year) / Dividend per Share in Previous Year) × 100 , Where, Dividend per share in current year is the dividend paid per share in the current year. Dividend per share in the previous year is the dividend paid per share in the previous year.
Substituting the values given, Dividend per share in the current year, D1 = $1.28Dividend Growth Rate for the 1st year = 50%Normal Growth Rate, g = 3.1% Required rate of return, r = 14.7%We can calculate the expected dividend growth in years 2 to 4 as follows: Expected Dividend next year (D2) = $1.28 x (1 + 50%) = $1.92. Expected Dividend next to next year (D3) = $1.92 x (1 + 50%) = $2.88 .
Expected Dividend 4 years from now (D4) = $2.88 x (1 + 50%) = $4.32We now have all the values needed to calculate the price of BPC stock using the dividend discount model (DDM).
Price of Stock (P0) = (D1 / (1 + r)) + (D2 / (1 + r)²) + (D3 / (1 + r)³) + (D4 / (1 + r)⁴) + ((P4 x (1 + g)) / (1 + r)⁴)
Substituting the values we get:P0 = ($1.28 / (1 + 14.7%)) + ($1.92 / (1 + 14.7%)²) + ($2.88 / (1 + 14.7%)³) + ($4.32 / (1 + 14.7%)⁴) + (($4.32 x (1 + 3.1%)) / (1 + 14.7%)⁴)P0 = $1.12 + $1.51 + $1.88 + $2.22 + $38.73P0 = $45.46
Therefore, the value of BPC stock is closest to $45.46.
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