In: Finance
An analyst uses a two-stage variable growth model to estimate the value of Old Maid Company's common stock. | |||||
The most recent annual dividend paid by the company was $3 per share. The analyst expects dividends to increase | |||||
8% per year for the next 3 years and then drop to 4% starting in year 4 and remain stable for the foreseable future. | |||||
The required rate of return used for the analysis is 10% | |||||
a) What are the expected dividends for the next 4 years? | |||||
b) What is the value of the stock attributable to the first 3 years of dividends? (use NPV function) | |||||
c) What is the value of the stock at the end of year 3? (use constant-growth model) | |||||
d) What is the value of the stock attributable to years 4 and beyond? (use pv function, where answer to part C is the fv) | |||||
e) What is the total value of the stock? | |||||
Question 5b | Question 5c | Question 5d | Question 5e | ||
$8.68 | $65.50 | $49.21 | $57.89 |