If 1) the expected return for Litchfield Design stock is 19.65 percent; 2) the dividend is...

If 1) the expected return for Litchfield Design stock is 19.65 percent; 2) the dividend is expected to be 2.34 dollars in 2 year(s), 5.7 dollars in 4 years, and 9.33 dollars in 7 years; and 3) after the dividend is paid in 7 years, the dividend is expected to grow by 2.44 percent per year forever, then what is the current price of the stock? If no expected dividend is mentioned for a given year, assume the expected dividend is $0 for that year.

Expert Solution

Calculation of current price:
year	Cashflows	PVF @19.65%	Present value
1	-	0.836	-
2	2.34	0.699	1.63
3	-	0.584	-
4	5.70	0.488	2.78
5	-	0.408	-
6	-	0.341	-
7	9.33	0.285	2.66
7	55.54	0.285	15.83
Total			22.90
Current price is $22.90

Working:
Terminal value= Dividend(1+growth)/(return-growth)
=9.33*(1+0.0244)/(0.1965-0.0244)= 55.54

jeff jeffy answered 1 year ago

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