CYZ Enterprises has the following expected dividends: $1.02 inone year, $1.21 in two years, and...

CYZ Enterprises has the following expected dividends: $1.02 in one year, $1.21 in two years, and $1.32 in three years. After that, its dividends are expected to grow at 3.9% per year forever (so that year 4's dividend will be 3.9% more than $1.32 and so on). If CYZ's equity cost of capital is 11.7%, what is the current price of its stock?

The price of the stock will be ________

Expert Solution

Stock Price :
PV of cash flows from it.

P = D1 / [ Ke - g ]
D1 - Div after 1 Year
P0 - Price Today
Ke - Required Ret = 11.7 %
g - Growth rate

Particulars	Year	Value
Starting Dividend	1	$ 1.02

Year	Cash Flow / Div
1	$ 1.02
2	$ 1.21
3	$ 1.32
4	$ 1.37

Dividend for fourth year = Dividend for third year * (1+growth rate) = 1.32 * (1.039) = $ 1.37

Particulars	Amount
nth Period	4
D4	$ 1.3700
Growth rate	3.90%
Ke	11.70%

nth Period - From which period Stable Growth is there.

Price of Stock is nothing but PV of CFs from it.
P3 = D4 / [ Ke - g ]
= $ 1.37 / [ 11.7 % - 3.9 % ]
= $ 1.37 / [ 7.8 % ]
= $ 17.56
Stock Price : PV of cash flows from it.

Year	Particulars	Cash Flow	PVF @11.7 %	Disc CF
1	D1	$ 1.02	0.8953	$ 0.91
2	D2	$ 1.21	0.8015	$ 0.97
3	D3	$ 1.32	0.7175	$ 0.95
3	P3	$ 17.56	0.7175	$ 12.60
		Price of the stock		$ 15.43

current price of the stock P0 = $ 15.43

jeff jeffy answered 2 years ago

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