Question

In: Finance

Trentham Estate Ltd expects to grow at a rate of 22 per cent for the next 5 years and then settle to a constant-growth rate of 6 per cent.


Trentham Estate Ltd expects to grow at a rate of 22 per cent for the next 5 years and then settle to a constant-growth rate of 6 per cent.

The company’s most recent dividend was $2.35.

The required rate of return is 15 per cent.

a Find the present value of the dividends during the rapid growth period.

b What is the price of the share at the end of year 5?

c What is the price of the share today?

Solutions

Expert Solution

a.

PV of dividends during rapid growth period:

PV of Dividends = 2.35 x (1+22%)^1/(1+15%)^1 + 2.35 x (1+22%)^2/(1+15%)^2 + 2.35 x (1+22%)^3/(1+15%)^3 + 2.35 x (1+22%)^4/(1+15%)^4 + 2.35 x (1+22%)^5/(1+15%)^5

PV of Dividends = 14.07794

PV of Dividends = $14.08

b.

Price of share at end of 5th year = 2.35 x (1+22%)^5 x (1+6%) / (15%-6%)

Price of share at end of 5th year = 74.80496

Price of share at end of 5th year = $74.80

c.

Price of share today = PV of Dividends + PV of (Price of share at end of 5th year)

Price of share today = 14.07794 + (74.80496)/(1+15%)^5

Price of share today = 51.26923

Price of share today = $51.27

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

MM company expects to grow at a rate of 25per cent for the next 5 years...
MM company expects to grow at a rate of 25per cent for the next 5 years and then settle to a constant-growth rate of 6 per cent. The company's recent dividend was $2.35. The required rate of return is 15 per cent a.Find the present value of the dividends during the rapid growth b.What is the price of the share at the end of year c.What is the price of the share today
A stock is expected to grow at a rate of 22% for the next three years....
A stock is expected to grow at a rate of 22% for the next three years. A recent dividend paid was $1.35 per share. After three years, the stock is expected to grow at a constant rate of 12% per year. If the minimum acceptable rate of return is 14%, what is the current expected price? Show all work.
Magnetic Corporation expects dividends to grow at a rate of 17% for the next two years....
Magnetic Corporation expects dividends to grow at a rate of 17% for the next two years. After two years dividends are expected to grow at a constant rate of 6.1%, indefinitely. Magnetic’s required rate of return is 11.2% and they paid a $1.65 dividend today. What is the value of Magnetic Corporation’s common stock per share? (Show your answers to the nearest cent) What is Dividend at end of year 1: What is Dividend at end of year 2: What...
Magnetic Corporation expects dividends to grow at a rate of 19.9% for the next two years....
Magnetic Corporation expects dividends to grow at a rate of 19.9% for the next two years. After two years, dividends are expected to grow at a constant rate of 6.4%, indefinitely. Magnetic’s required rate of return is 14.6% and they paid a $1.36 dividend today. What is the value of Magnetic Corporation’s common stock per share today? (Show your answers to the nearest cent.)
Magnetic Corporation expects dividends to grow at a rate of 17% for the next two years....
Magnetic Corporation expects dividends to grow at a rate of 17% for the next two years. After two years dividends are expected to grow at a constant rate of 6.1%, indefinitely. Magnetic’s required rate of return is 11.2% and they paid a $1.65 dividend today. What is the value of Magnetic Corporation’s common stock per share? (Show your answers to the nearest cent) Dividend at end of year 1: Dividend at end of year 2: Dividend at end of year...
Wineries stores has forecast a high growth rate of 40 per cent for the next 2...
Wineries stores has forecast a high growth rate of 40 per cent for the next 2 years, followed by growth rates of 25 per cent and 20 per cent for the following 2 years. It then expects to stabilise its growth to a constant rate of 7.5 per cent for the next several years. The company paid a dividend of $3.80 recently. If the required rate of return is 15 per cent, what is the current market price of the...
Firm XYZ expects to earn $6 per share next year. In the next three years, the...
Firm XYZ expects to earn $6 per share next year. In the next three years, the firm’s ROE is expected to be 12%, 15%, 18%, respectively, and its dividend payout ratio is 90%. After that, the firm's ROE is expected to increase to 25%, and the firm will set the dividend payout ratio = 60%. Assume that the discount rate is 20%. Find the stock price
An investor considers a stock that expects to have high growth over the next 5 years...
An investor considers a stock that expects to have high growth over the next 5 years and then a constant growth rate thereafter. As a result, the stock follows the pattern of a two-stage valuation model. If the investor instead uses a constant growth model using the constant growth rate that the company expects after year 5, he/she:
TechNo Corp is a rapid-growth IT firm. TechNo expects to grow at 25% for the next...
TechNo Corp is a rapid-growth IT firm. TechNo expects to grow at 25% for the next four years. After year four, growth will moderate at 4.75%. TechNo expects to pay a dividend of $1.59 per share next year. If TechNo’s required return is 13.2% and the stock is currently selling at $45.77 per share, is the stock fairly valued? If not, by how much is it over- or under-valued?
McGaha Enterprises expects earnings and dividends to grow at a rate of 29% for the next...
McGaha Enterprises expects earnings and dividends to grow at a rate of 29% for the next 4 years, after the growth rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT