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Fire Co. pays great dividends.  The most recent annual dividend payment was $2.10 at the end of...

Fire Co. pays great dividends.  The most recent annual dividend payment was $2.10 at the end of December 2018.  For the next three years, Fire Co's dividends are expected to grow at 17 percent annually due to the company’s successful wood chopping mechanisms.  After the period of temporary growth, there is a 5 year transitional period in which dividends will decline by 2 percent each year until reaching a constant growth rate for the indefinite future.  If the discount rate for Fire Co.'s stock is 12 percent, what is the value of the stock today?

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Expert Solution

Required rate= 12.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 2.1 17.00% 2.457 2.457 1.12 2.1938
2 2.457 17.00% 2.87469 2.87469 1.2544 2.29169
3 2.87469 17.00% 3.3633873 3.3633873 1.404928 2.39399
4 3.3633873 15.00% 3.867895395 3.867895395 1.57351936 2.45812
5 3.867895395 13.00% 4.370721796 4.370721796 1.762341683 2.48006
6 4.370721796 11.00% 4.851501194 4.851501194 1.973822685 2.46
7 4.851501194 9.00% 5.288136301 5.288136301 2.210681407 2.39208
8 5.288136301 7.00% 5.658305843 121.088 126.7463058 2.475963176 51.19071
Long term growth rate (given)= 7.00% Value of Stock = Sum of discounted value = 67.86
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 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 1 day ago
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