Question
In: Finance
A firm recently paid a dividend of $1.25. It expects to have a dividend growth rate...
A firm recently paid a dividend of $1.25. It expects to have a dividend growth rate of 15% for the first 3 years followed by a constant rate of 6% thereafter. The firm’s required return is 10%. What is the firm’s stock value TODAY? Please show work in calculator, not Excel.
Solutions
Expert Solution
D0 = $1.25. g = 15% (for 1st 3 years) and g = 6% constant after that.
R = 10%.
Thus we have the following:
| Dividend | Year | Amount | g |
| D0 | 0 | 1.2500000 | |
| D1 | 1 | 1.4375000 | 15% |
| D2 | 2 | 1.6531250 | 15% |
| D3 | 3 | 1.9010938 | 15% |
| D4 | 4 | 2.0151594 | 6% |
Hence D5 = D4*(1+g) = 2.0151594*(1+6%) = 2.13607
So P4 = D5/(r-g). Or P4 = 2.13607/10% - 6%
= $53.40
So price today = present value of D1 tp D4 + present value of P4
= 1.4375/1.1 + 1.653125/1.1^2 + 1.9010938/1.1^3 + 2.0151594/1.1^4 + 53.40/1.1^4
= $30.90
Thus firm's stock value today = $30.90
(You can enter the above figures easily in a calculator)
jeff jeffy answered 7 months agoRelated Solutions
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