Question
In: Finance
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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Solutions
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
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