the dividends are paid at the beginning of every quarter, and the quarterly grow rates are...

the dividends are paid at the beginning of every quarter, and the quarterly grow rates are estimated to be 30%, 25%, 20%, 15% per quarter for the first quarters respectively, and stay constant as 5% thereafter. The effective quarterly interest rate is 10% per quarter. you are on dec 31st today and the next dividends shareholders are just about to receive is $1. what is the expected stock price at the end of 15 years in the future?

Expert Solution


Current Dividend	$1
Dividend at the end of Quarter 1	$1.30	(1*(1+0.3)
Dividend at the end of Quarter 2	$1.63	(1.30*(1+0.25)
Dividend at the end of Quarter 3	$1.95	(1.63*(1+0.2)
Dividend at the end of Quarter 4	$2.24	(1.95*(1+0.15)
Dividend at the end of Quarter 5	$2.35	(2.24*(1+0.05)

Present Value of Cash Flow
(Cash flow)/((1+i)^N)
i=discount rate =quarterly interest rate=10%=	0.1
N= Year of Cash Flow
Terminal Value at end of Quarter 4=2.35/(0.1-0.05)
Terminal Value at end of Quarter	$47.09
	N	A	PV=A/(1.1^N)
	Quarter	Cash Flow	Present Value
	1	$1.30	$1.18
	2	$1.63	$1.34
	3	$1.95	$1.47
	4	$2.24	$1.53
	4	$47.09	$32.16
		SUM	$37.69
Price of stock today	$37.69
Expected Price after 15 Years(15*4=60 quarters)	$703.95	(37.69*(1.05^60)

jeff jeffy answered 2 years ago

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