Question
In: Finance
Suppose we have a firm that is assumed to have a dividend growth rate of 23%...
Suppose we have a firm that is assumed to have a dividend growth rate of 23% for the next two years, then 5% per year afterward. The cost of equity is assumed to be 18%. Assume that the stock recently paid a dividend of $9. The Compute the value of the stock.
Solutions
Expert Solution
D1=(9*1.23)=11.07
D2=(11.07*1.23)=13.6161
Value after year 2=(D2*Growth rate)/(Cost of equity-Growth rate)
=(13.6161*1.05)/(0.18-0.05)
=109.976192
Hence value of stock=Future dividend and value*Present value of discounting factor(rate%,time period)
=11.07/1.18+13.6161/1.18^2+109.976192/1.18^2
=$98.14(Approx)
jeff jeffy answered 2 years agoRelated Solutions
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