Question

Assume Highline Company has just paid an annual dividend of $ 0.98 . Analysts are predicting an 11.9 % per year growth rate in earnings over the next five years. After​ then, Highline's earnings are expected to grow at the current industry average of 4.9 % per year. If​ Highline's equity cost of capital is 7.8 % per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell?

The Value of HIghline's stock is $___. (round to nearest cent.)

Answer 1

	Required rate=	7.80%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0.98	11.90%	1.09662		1.09662	1.078	1.0173
2	1.09662	11.90%	1.22711778		1.22711778	1.162084	1.05596
3	1.22711778	11.90%	1.373144796		1.373144796	1.252726552	1.09612
4	1.373144796	11.90%	1.536549027		1.536549027	1.350439223	1.13781
5	1.536549027	11.90%	1.719398361	62.195	63.91439836	1.455773483	43.90408
	Long term growth rate (given)=	4.90%			Value of Stock =	Sum of discounted value =	48.21
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 5 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor