a. A stock just paid a dividend of $1.04. The dividend is expected to grow at...

a. A stock just paid a dividend of $1.04. The dividend is expected to grow at 26.98% for three years and then grow at 4.97% thereafter. The required return on the stock is 11.63%. What is the value of the stock?

b. A stock just paid a dividend of $1.17. The dividend is expected to grow at 22.53% for five years and then grow at 4.80% thereafter. The required return on the stock is 14.27%. What is the value of the stock?

Solutions

Expert Solution

a. P0 = [D0(1 + g1) / (R − g1)]{1 − [(1 + g1) / (1 + R)]^t} + [(1 + g1) / (1 + R)]^t[D0(1 + g2) / (R − g2)]

P0 = [$1.04(1.2698) / (0.1163 − 0.2698)][1 − (1.2698 / 1.1163)^3] + [(1.2698) / (1.1163)]^3[$1.04(1.0497) / (0.1163 − 0.0497)]

P0 = $28.19

b. P0 = [D0(1 + g1) / (R − g1)]{1 − [(1 + g1) / (1 + R)]^t} + [(1 + g1) / (1 + R)]^t[D0(1 + g2) / (R − g2)]

P0 = [$1.17(1.2253) / (0.1427 − 0.2253)][1 − (1.2253 / 1.1427)^5] + [(1.2253) / (1.1427)]^5[$1.17(1.0480) / (0.1427 − 0.0480)]

P0 = $25.60

jeff jeffy answered 2 years ago

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