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Carla Vista, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for...

Carla Vista, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a constant-growth rate of 8 percent is expected. The firm expects to pay its first dividend of $2.26 a year from now. If dividends will grow at the same rate as the firm and the required rate of return on stocks with similar risk is 22 percent, what is the current value of the stock? (Round all intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)

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Expert Solution

Required rate= 22.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 0 30.00% 2.26 2.26 1.22 1.8525
2 2.26 30.00% 2.938 2.938 1.4884 1.97393
3 2.938 17.00% 3.43746 3.43746 1.815848 1.89303
4 3.43746 17.00% 4.0218282 31.026 35.0478282 2.21533456 15.82056
Long term growth rate (given)= 8.00% Value of Stock = Sum of discounted value = 21.54
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 4 *(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 month ago
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