Question

Assume Highline Company has just paid an annual dividend of $1.08. Analysts are predicting an 10.2% 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 5.1% per year. If​ Highline's equity cost of capital is 9.1% 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 the nearest​ cent.)

Answer 1

	Required rate=	9.10%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1.08	10.20%	1.19016		1.19016	1.091	1.0909
2	1.19016	10.20%	1.31155632		1.31155632	1.190281	1.10189
3	1.31155632	10.20%	1.445335065		1.445335065	1.298596571	1.113
4	1.445335065	10.20%	1.592759241		1.592759241	1.416768859	1.12422
5	1.592759241	10.20%	1.755220684	46.118	47.87322068	1.545694825	30.97197
	Long term growth rate (given)=	5.10%			Value of Stock =	Sum of discounted value =	35.40
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