Question

Assume Highline Company has just paid an annual dividend of $0.92. Analysts are predicting an 10.2% 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 4.8% per year. If​ Highline's equity cost of capital is 7.5% per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell?

Answer 1

	Required rate=	7.50%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0.92	10.20%	1.01384		1.01384	1.075	0.9431
2	1.01384	10.20%	1.11725168		1.11725168	1.155625	0.96679
3	1.11725168	10.20%	1.231211351		1.231211351	1.242296875	0.99108
4	1.231211351	10.20%	1.356794909		1.356794909	1.335469141	1.01597
5	1.356794909	10.20%	1.49518799	58.035	59.53018799	1.435629326	41.46627
	Long term growth rate (given)=	4.80%			Value of Stock =	Sum of discounted value =	45.38
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 5 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor