Stock Valuation: Calculating the Current Price of Cx Enterprises' Stock

How can we calculate the current price of Cx Enterprises' stock?

What are the expected dividends of Cx Enterprises and how do we determine the current price of its stock?

Calculating the Current Price of Cx Enterprises' Stock:

To calculate the current price of Cx Enterprises' stock, we need to consider the expected dividends and the company's equity cost of capital. Let's break down the process step by step.

Cx Enterprises has the following expected dividends: $1.03 in one year, $1.25 in two years, and $1.32 in three years. After the third year, the dividends are expected to grow at a constant rate of 3.5% per year indefinitely.

The equity cost of capital for Cx Enterprises is 12.5%. To calculate the current price of the stock, we need to determine the present value of its future dividends.

For the first three years, we discount the exact amounts of dividends at the 12.5% equity cost. From the fourth year onwards, where dividends grow at a consistent rate of 3.5%, we apply Gordon's growth model.

To calculate the price of the stock with dividends that grow at a constant rate, we use Gordon's growth model formula:

P = D / (k - g)

Where:

P = Price of the stock

D = Dividend per share expected in one year

k = Required rate of return

g = Growth rate in dividends

By applying this model and discounting the dividends for the first three years, we can determine the current price of Cx Enterprises' stock.

So, the current price of the stock can be calculated as the present value of its future dividends based on the equity cost of capital and expected growth rate.