Zeta Inc. expects earnings/dividends to grow at an annual rate of 20, 15, and 10 percent...

Zeta Inc. expects earnings/dividends to grow at an annual rate of 20, 15, and 10 percent respectively over the next three years after which the company settles into a constant growth pattern of 5 percent per year indefinitely. If current dividend is $ 2 per share and investors require a 16 percent annual return on Vega stock, what is a fair price for a share of Vega's stock today?

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Ans:- Stock Price (P0) = D1/(ke-g), where ke is the required rate of return and g is the growth rate. D1 is calculated by D0*(1+g), where D0 is the current dividend or last dividend paid and g is the growth.

To find the fair price of the stock, first, we need to calculate the present value of all the future cash flows and then add all the present values to get the fair price of the stock.

The market price at year 3 is calculated by D4/(ke-g), where D4 is the dividend 4.

The fair price of the Vegas stock today is $24.63.

jeff jeffy answered 1 year ago

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