Question

Teddy Company paid a $3.50 dividend this year (D0 = $3.50). Next year the company expects to pay a $4.00 dividend (D1 = $4.00). The stock's dividend is expected to grow at a rate of 15 percent a year until three years from now (t = 3). After this time, the stock's dividend is expected to grow at a constant rate of 4 percent a year. Currently, the risk-free rate is 5 percent, market risk premium (rM - rRF) is 8 percent, and the stock's beta is 1.3. What should be the price of the stock today?

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