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Suppose we have a firm that is assumed to have a dividend growth rate of 26%...

Suppose we have a firm that is assumed to have a dividend growth rate of 26% for the next two years, then 7% per year afterward. The cost of equity is assumed to be 15%. Assume that the stock recently paid a dividend of $6. The Compute the value of the stock.

Solutions

Expert Solution

D1=(6*1.26)=7.56

D2=(7.56*1.26)=9.5256

Value after year 2=(D2*Growth rate)/(Cost of equity-Growth rate)

=(9.5256*1.07)/(0.15-0.07)

=127.4049

Hence value of stock=Future dividend and value*Present value of discounting factor(rate%,time period)

=7.56/1.15+9.5256/1.15^2+127.4049/1.15^2

=$110.11(Approx)

jeff jeffy answered 2 years ago
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