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Compute the value of a share of common stock of Lexus Hotel Berhad whose most recent...
Compute the value of a share of common stock of Lexus Hotel Berhad whose most recent dividend was RM2.50 and is expected to grow at 3.50 percent per year for the next 5 years, 5 percent per year for the next 3 years, after which the dividend growth rate will increase to 6 percent per year indefinitely. Assume 10.00 percent required rate of return.
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Expert Solution
| Required rate= | 10.00% | ||||||
| Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |
| 1 | 2.5 | 3.50% | 2.5875 | 2.5875 | 1.1 | 2.3523 | |
| 2 | 2.5875 | 3.50% | 2.6780625 | 2.6780625 | 1.21 | 2.21327 | |
| 3 | 2.6780625 | 3.50% | 2.771794688 | 2.771794688 | 1.331 | 2.08249 | |
| 4 | 2.771794688 | 3.50% | 2.868807502 | 2.868807502 | 1.4641 | 1.95943 | |
| 5 | 2.868807502 | 3.50% | 2.969215764 | 2.969215764 | 1.61051 | 1.84365 | |
| 6 | 2.969215764 | 5.00% | 3.117676552 | 3.117676552 | 1.771561 | 1.76 | |
| 7 | 3.117676552 | 5.00% | 3.27356038 | 3.27356038 | 1.9487171 | 1.67985 | |
| 8 | 3.27356038 | 5.00% | 3.437238399 | 91.087 | 94.5242384 | 2.14358881 | 44.09625 |
| Long term growth rate (given)= | 6.00% | Value of Stock = | Sum of discounted value = | 57.99 |
| 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 | |||
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