Question

In: Finance

Assume Highline Company has just paid an annual dividend of $ 1.01. Analysts are predicting an...

Assume Highline Company has just paid an annual dividend of $ 1.01. Analysts are predicting an 10.1 % 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 5.3 % per year. If​ Highline's equity cost of capital is 8.6 % per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell?

Solutions

Expert Solution

Ans.

Year Dividends(a) Discounting factor @ 8.6% (b) Present Value (a*b)
1 $               1.11 0.92081031 $            1.02
2 $               1.22 0.84789163 $            1.04
3 $               1.35 0.78074736 $            1.05
4 $               1.48 0.71892022 $            1.07
5 $               1.63 0.66198915 $            1.08
$            5.26

Formulas

A/1 B C D E
2 Year Dividends(a) Discounting factor @ 8.6% (b) Present Value (a*b)
3 1 =1.01*1.101 =1/1.086 =+C3*D3
4 2 =+C3*1.101 =+D3/1.086 =+C4*D4
5 3 =+C4*1.101 =+D4/1.086 =+C5*D5
6 4 =+C5*1.101 =+D5/1.086 =+C6*D6
7 5 =+C6*1.101 =+D6/1.086 =+C7*D7
8 =SUM(E3:E7)

P5 = D6 / Re - g

P5 = $ 1.63 * ( 1.053) / 8.6% - 5.3%

P5 = $ 1.72062544 / 3.3% = $ 52.14016485

Present Value = $ 52.14016485 / (1.086)^5

Present Value = $ 34.5162236 or $ 34.52

Price = $ 5.26 + $ 34.52 = $ 39.78


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