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Lawrence comp paid $2.00 per share in common stock dividends last year. The company will allow...

Lawrence comp paid $2.00 per share in common stock dividends last year. The company will allow its dividend to grow at 8 percent for 7 years, and after that the rate of growth will be 6 percent forever. What is the value of the stock if the required rate of return is 10 percent?

the Lawrence company is subject to capital rationing and has a capital budget of $2,000,000; the firm's cost of capital is 16 percent.

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Expert Solution

Value of stock = present value of dividends upto 7 years + present value of terminal value at end of 7 years from now

The dividends upto 7 years, and their present values @ 10% discount rate are as below :

present value of dividends upto 7 years = $12.05

Terminal value at end of 7 years = year 8 dividend / (required return - constant growth rate)

Terminal value at end of 7 years = ($3.17 + 6%) / (10% - 6%)

Terminal value at end of 7 years = $84.10

preset value of terminal value = $84.10 / (1 + 10%)7 = $43.16

value of stock = $12.05 + $43.16 = $55.21

jeff jeffy answered 3 months ago
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