Question
In: Finance
Suppose we have a firm that is assumed to have a dividend growth rate of 20%...
Suppose we have a firm that is assumed to have a dividend growth rate of 20% for the next three years, then 5% per year afterward. The cost of equity is assumed to be 15%. Assume that the stock recently paid a dividend of $9. The Compute the value of the stock
Solutions
Expert Solution
D1=(9*1.2)=10.8
D2=(10.8*1.2)=12.96
D3=(12.96*1.2)=15.552
Value after year 3=(D3*Growth rate)/(Cost of equity-Growth rate)
=(15.552*1.05)/(0.15-0.05)
=163.296
Hence value of stock=Future dividend and value*Present value of discounting factor(rate%,time period)
=10.8/1.15+12.96/1.15^2+15.552/1.15^3+163.296/1.15^3
=$136.79(Approx)
jeff jeffy answered 2 years agoRelated Solutions
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