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Swanton Industries is expected to pay a dividend of $5 per year for 10 years and...

Swanton Industries is expected to pay a dividend of $5 per year for 10 years and then increase the dividend to $10 per share for every year thereafter. The required rate of return on this stock is 20 percent. What is the estimated stock price for Swanton?

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Expert Solution

PV of perpetual CF = Perpetual CF/(interest rate-growth rate)
PV of perpetual CF = 10/(0.2-0)
PV of perpetual CF = 50
Stock
Discount rate 0.2
Year 0 1 2 3 4 5 6 7 8 9 10
Cash flow stream 0 5 5 5 5 5 5 5 5 5 55
Discounting factor 1 1.2 1.44 1.728 2.0736 2.48832 2.985984 3.583181 4.299817 5.15978 6.191736
Discounted cash flows project 0 4.166667 3.472222 2.893519 2.4112654 2.009388 1.67449 1.395408 1.16284 0.969033 8.882807
NPV = Sum of discounted cash flows
NPV Stock = 29.04
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor

jeff jeffy answered 10 months ago
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