Red Sun Rising just paid a dividend of $2.01 per share. The company said that it will increase the dividend by 25 percent and 20 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.1 percent. If the required return is 10.1 percent, what is the stock price today

The stock price today is $41.40.

Dividend at year 0 = D0 = $2.01

Dividend at year 1 = D1 = $2.01 × 1.25 = $2.5125

Dividend at year 2 = D2 = $2.5125 × 1.20 = $3.015

So

P2 = D2 × (1 + growth rate) ÷ (required rate of return - growth rate)

= $3.015 × 1.031 ÷ (0.101-0.031)

= $44.4066

Now  

= $2.5125 ÷ 1.101 + $3.015 ÷ 1.101^2 + $44.4066 ÷ 1.101^2

= $41.40

Therefore we can conclude that the stock price today is $41.40.

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$41.40

Explanation:

For computing the stock price for today first we have to do the following calculations

Dividend at year 0 = D0 = $2.01

Dividend at year 1 = D1 = $2.01 × 1.25 = $2.5125

Dividend at year 2 = D2 = $2.5125 × 1.20 = $3.015

Now, we have to determine the price for year 2

P2 = D2 × (1 + growth rate) ÷ (required rate of return - growth rate)

= $3.015 × 1.031 ÷ (0.101-0.031)

= $44.4066

And, finally  

Current price is

= $2.5125 ÷ 1.101 + $3.015 ÷ 1.101^2 + $44.4066 ÷ 1.101^2

= $41.40

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