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Pera inc does not currently pay dividends. The company will start with an annual dividend of...

Pera inc does not currently pay dividends. The company will start with an annual dividend of $13 at the end of year 4 and will pay the same amount each year until year 8. Thereafter, it will increase the dividends by 2% per year forever. If the required rate of return on this stock is 8%, what is the price of this stock today?

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Expert Solution

Required rate= 8.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 0 0.00% 0 0 1.08 0
2 0 0.00% 0 0 1.1664 0
3 0 0.00% 0 0 1.259712 0
4 0 0.00% 13 13 1.36048896 9.55539
5 13 0.00% 13 13 1.469328077 8.84758
6 13 0.00% 13 13 1.586874323 8.19
7 13 0.00% 13 13 1.713824269 7.58538
8 13 0.00% 13 221 234 1.85093021 126.42292
Long term growth rate (given)= 2.00% Value of Stock = Sum of discounted value = 160.6
Where
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 10 months ago
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