Question

In: Finance

CX Enterprises has the following expected​ dividends: $1.12 in one​ year, $1.18 in two​ years, and...

CX Enterprises has the following expected​ dividends: $1.12 in one​ year, $1.18 in two​ years, and $1.33 in three years. After​ that, its dividends are expected to grow at 4.3% per year forever​ (so that year​ 4's dividend will be 4.3% more than $1.33 and so​ on). If​ CX's equity cost of capital is 11.7%​, what is the current price of its​ stock?

Solutions

Expert Solution

D1 = $1.12

D2 = $1.18

D3 = $1.33

D4 = D3 * (1 + g) = $1.33 * (1 + 0.043) = $1.39

P3 = D4/(r-g) = $1.39/(0.117-0.043) = $1.39/0.074 = $18.75

P0 = [D1/(1+r)] + [D2/(1+r)2] + [(D3+P3)/(1+r)3]

= [$1.12/(1+0.117)] + [$1.18/(1+0.117)2] + [($1.33+$18.75)/(1+0.117)3]

= $1.00 + $0.95 + $14.41

= $16.35


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