The dividends of XYX Ltd are expected to grow at a rate of 5%, 10% and...

The dividends of XYX Ltd are expected to grow at a rate of 5%, 10% and 15% p.a. during years 1 through 3 respectively. After that, the dividends are expected to grow at a long-run rate of 5% p.a. forever. The company’s current dividend per share is $1.50 and the required rate of return on the shares is 12% p.a. Based on this information, the current price should be closest to:

Solutions

Expert Solution

VALUE of supper normanl growth rate

year cashflow pv@12% present value

1 $1.50(1.05)=1.575 0.893 1.41

2 $1.575(1.10)=1.7325 0.797 1.38

3 $1.7325(1.15)=1.9924 0.722 1.44

TOTAL=$4.23

VALUE of constant growth rate p3=d4/ke-kg

=1.9924(1.05)/0.12-0.06

=2.092/0.06

=34.87(it is terminal value)

present value of p3@t=0

=34.87*1/(1.12)3

=34.87*1/1.4049

=34.87*0.7117

=24.8202

PRESENT VALUE=$4.23+$24.8202

=$29.05

NOTE-

first we have found super growth rate,then we have to find constant growth rate through terminal value.

we have to convert terminal value in present value.

present value is equal supper growth rate + constant growth rate.

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

AT&T just paid a $5 dividend, dividends are expected to grow at a 10% rate for...

AT&T just paid a $5 dividend, dividends are expected to grow at a 10% rate for the next three years and at a 5% rate after that. What is the value of the stock if investors require a 13% return to purchase the stock?

The dividends of CMC Ltd are expected to grow at a constant annual rate over the...

The dividends of CMC Ltd are expected to grow at a constant annual rate over the foreseeable future. The company has recently paid a dividend per share of $1.00, and the required rate of return on the shares is 10% p.a. Based on this information, the current price of the shares has been estimated at $25.00. The constant annual growth rate in dividends that is implied by this information is closest to:

Hudaverdi Ltd pay current dividends of $0.61 per share with these dividends expected to grow at...

Hudaverdi Ltd pay current dividends of $0.61 per share with these dividends expected to grow at a rate of 2% per year in perpetuity. Hudaverdi Ltd shares are currently trading at $6.91 per share. What is the cost of equity finance for Hudaverdi Ltd? Give your answer as a percentage per annum to 1 decimal place. Cost of equity = % pa Gertrude's Great Gloves issue bonds with a face value of $1,000, paying interest at j2 = 6.75%, redeemable in...

3. The expected dividend next year is $1.30 and dividends are expected to grow at 5%...

3. The expected dividend next year is $1.30 and dividends are expected to grow at 5% forever. What is the value of this promised dividend stream if the discount rate is a) 8% b) 5% c) 3%

Hughes Co. is growing quickly. Dividends are expected to grow at a 15.8 % rate for...

Hughes Co. is growing quickly. Dividends are expected to grow at a 15.8 % rate for the next three years, with the growth rate falling off to a constant 3.1 % thereafter. If the required return is 8.4 % and the company just paid a $1.69 dividend, what is the current share price? (Round answer to 2 decimal places. Do not round intermediate calculations).

Caskey inc. is experiencing a period of growth. Dividends are expected to grow at a rate...

Caskey inc. is experiencing a period of growth. Dividends are expected to grow at a rate of 13.00% for the next two years and 5.00% thereafter. Yesterday the corporation paid a dividend of $1.06. If the required rate of return is 8.00%, what is the intrinsic value of the stock?

Dividends are expected to grow at 1.7% rate indefinitely, and the last dividend was $6. If...

Dividends are expected to grow at 1.7% rate indefinitely, and the last dividend was $6. If the relevant risk return is 5%, what would you be willing to pay for the stock. A) $120.000 B) S122.000 C) $181.818 D) $184.909 E) $ 5.811

Suppose that a company pays annual dividends that are expected to grow at a constant rate...

Suppose that a company pays annual dividends that are expected to grow at a constant rate of 6% per year forever. The company just paid a dividend of $2. If the market requires an annual return of 14% on this stock, what should we expect the price to be in 5 years?

The earnings and dividends of Ned Computer Co. are expected to grow at an annual rate...

The earnings and dividends of Ned Computer Co. are expected to grow at an annual rate of 15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year. Ned currently pays a dividend of $1 per share. What is the value of Ned stock to an investor who requires a 12 percent rate of return? Hints: 1) Calculate dividend for year 1 ~ 4 2) Terminal value at the end of...

Shell is experiencing rapid growth. Earnings and dividends are expected to grow at a rate of...

Shell is experiencing rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next 2 years, at 13% the following year, and at a constant rate of 6% during Year 4 and thereafter. Its last dividend was $1.15, and its required rate of return is 12%. b) Find the PV of the firm’s stock price at the end of Year 3. f) Calculate the dividend and capital gains yields for Years 1, 2, and...

Subjects