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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

D0 = 9

D1 = 9*1.20 = 10.80

D2 = 10.80 * 1.20 = 12.96

D3 = 12.96 * 1.20 = 15.552

D4 = 15.552 * 1.05 = 16.3296

Terminal value at the end of 3 years (T3) = D4 / (R - G)

= 16.3296 / (0.15 - 0.05)

= 163.296

Stock price today = D1/(1+R) + D2/(1+R)^2 + (D3 + T3)/(1+R)^3

= 10.80/(1+15%) + 12.96/(1+15%)^2 + (15.552+163.296)/(1+15%)^3

= 136.79

jeff jeffy answered 2 years ago
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