XYZ company presently pays a dividend of $ 1.50 per share on its common stock. The...

XYZ company presently pays a dividend of $ 1.50 per share on its common
stock. The company expects to increase the dividend at a 20% annual rate the
first four years and at the rate of 13% at the next four years then the growth on
the dividend at a 7% thereafter. This phased growth patterns is in keeping with
the expected life cycle of earnings. You are required a 16% return to invest in
this stock. What value should you place on a share of this Stock?

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Expert Solution

	Required rate=	16.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1.5	20.00%	1.8		1.8	1.16	1.5517
2	1.8	20.00%	2.16		2.16	1.3456	1.60523
3	2.16	20.00%	2.592		2.592	1.560896	1.66058
4	2.592	20.00%	3.1104		3.1104	1.81063936	1.71785
5	3.1104	13.00%	3.514752		3.514752	2.100341658	1.67342
6	3.514752	13.00%	3.97166976		3.97166976	2.436396323	1.63
7	3.97166976	13.00%	4.487986829		4.487986829	2.826219735	1.58798
8	4.487986829	13.00%	5.071425117	60.294	65.36542512	3.278414892	19.93812
	Long term growth rate (given)=	7.00%			Value of Stock =	Sum of discounted value =	31.37

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

jeff jeffy answered 1 year ago

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