A7X Corp. just paid a dividend of $1.30 per share. The dividends are expected to grow...

A7X Corp. just paid a dividend of $1.30 per share. The dividends are expected to grow at 35 percent for the next 8 years and then level off to a growth rate of 6 percent indefinitely.

If the required return is 14 percent, what is the price of the stock today?

Multiple Choice

$92.39
$2.93
$90.58
$88.77
$66.62

Expert Solution

	Required rate=	14.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1.3	35.00%	1.755		1.755	1.14	1.5395
2	1.755	35.00%	2.36925		2.36925	1.2996	1.82306
3	2.36925	35.00%	3.1984875		3.1984875	1.481544	2.15889
4	3.1984875	35.00%	4.317958125		4.317958125	1.68896016	2.55658
5	4.317958125	35.00%	5.829243469		5.829243469	1.925414582	3.02753
6	5.829243469	35.00%	7.869478683		7.869478683	2.194972624	3.59
7	7.869478683	35.00%	10.62379622		10.62379622	2.502268791	4.24567
8	10.62379622	35.00%	14.3421249	190.033	204.3751249	2.852586422	71.64555
	Long term growth rate (given)=	6.00%			Value of Stock =	Sum of discounted value =	90.58

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year

Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 8 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

jeff jeffy answered 6 months ago

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