A firm has been growing at 20% per year, and you expect this growth rate will...

A firm has been growing at 20% per year, and you expect this growth rate will continue for another 3 years. After that it will face more competition and slip into a constant growth rate of 5% forever. If the discount rate is 10% and last dividend paid was $3.

(a) What will the next dividend be?
(b) What is the expected price of the stock 3 years from now?
(c) What should the stock price be today?

Solutions

Expert Solution

D1=(3*1.2)=$3.6

D2=(3.6*1.2)=4.32

D3=(4.32*1.2)=5.184

P3=(D3*Growth rate)/(Required return-Growth rate)

=(5.184*1.05)/(0.1-0.05)

=$108.864

Current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=3.6/1.1+4.32/1.1^2+5.184/1.1^3+108.864/1.1^3

=$92.53(Approx)

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Lite Events has been growing at a rate of 20% per year, and you expect this...

Lite Events has been growing at a rate of 20% per year, and you expect this growth rate in earnings and dividends to continue for another 4 years. The last dividend paid was $2, and if the steady (i.e., constant) growth rate after 4 years is 5%, what should the stock price be today? Assume that the stock has a beta of 2.0, Treasury bills yield 3%, and the market risk premium is 6%. *work please

Tattletale News Corp. has been growing at a rate of 20% per year, and you expect...

Tattletale News Corp. has been growing at a rate of 20% per year, and you expect this growth rate in earnings and dividends to continue for another 3 years. The last dividend paid was $2. The discount rate is 15% and the steady growth rate after 3 years is 4%. a. What is the capital gain in stock price from year 0 to year 1? (Do not round intermediate calculations. Enter your answer as a dollar amount rounded to 3...

Type 1A: Brite Events has been growing at a rate of 20% per year, and you...

Type 1A: Brite Events has been growing at a rate of 20% per year, and you expect this growth rate in earnings and dividends to continue for another 4 years. The last dividend paid was $2, and if the steady (i.e., constant) growth rate after 4 years is 5%, what should the stock price be today? Assume that the stock has a beta of 2.0, Treasury bills yield 3%, and the market risk premium is 6%.

Nonconstant Growth Stock Valuation Conroy Consulting Corporation (CCC) has been growing at a rate of 20%...

Nonconstant Growth Stock Valuation Conroy Consulting Corporation (CCC) has been growing at a rate of 20% per year in recent years. This same non-constant growth rate is expected to last for another 2 years (g0,1 = g1,2 = 20%). If D0= $1.10, rs= 12% and gL = 8%, then what is CCC's stock worth today? Round your answer to the nearest cent. Do not round your intermediate computations. $ What is its expected dividend yield at this time? Round the...

Consider an imaginary economy that has been growing at a rate of 4% per year. Government...

Consider an imaginary economy that has been growing at a rate of 4% per year. Government economists have proposed a number of policies to increase the growth rate but first need to convince the President that the policies will pay off. To do so, they want to present a comparison of the number of years it will take for the economy to double, depending on the growth rate. According to the rule of 70, determine the number of years it...

Consider an imaginary economy that has been growing at a rate of 3% per year. Government...

Consider an imaginary economy that has been growing at a rate of 3% per year. Government economists have proposed a number of policies to increase the growth rate but first need to convince the president that the policies will pay off. To do so, they want to present a comparison of the number of years it will take for the economy to double, depending on the growth rate. Using the rule of 70, determine the number of years it will...

XYZ has been growing at a rate of 30% per year in recent years. This same...

XYZ has been growing at a rate of 30% per year in recent years. This same supernormal growth is expected to last for another two years (30% for Year 0 to Year 1 and Year 1 to Year 2), then at a constant rate of 10% thereafter. a. If D0 = RM1.80, rs = 12%, then what is XYZ’s stock worth today? What is the expected dividend yield and its capital gains yield at this time?

If you expect a firm to pay a $1.8 per year in perpetuity, your tax rate...

If you expect a firm to pay a $1.8 per year in perpetuity, your tax rate is 25%, and your required rate of return is 12.4%. How much are you willing to pay for its stock? Round answer to two decimal places.

5. Assume that the economy has been growing at 2 % per year. You are an...

5. Assume that the economy has been growing at 2 % per year. You are an economist working at a Central Bank and need to establish what are the long-run effects of increasing the growth of the money supply to 10 % per year. State and then explain the long-run effects of this change on each of the following (give numerical estimates when possible): a) The annual rate of inflation b) The real interest rate c) The nominal interest rate

Taussig Technologies Corporation (TTC) has been growing at a rate of 14% per year in recent...

Taussig Technologies Corporation (TTC) has been growing at a rate of 14% per year in recent years. This same growth rate is expected to last for another 2 years, then decline to gn = 8%. If D0 = $2.70 and rs = 9%, what is TTC's stock worth today? Do not round intermediate calculations. Round your answer to the nearest cent. $ What is its expected dividend yield at this time, that is, during Year 1? Do not round intermediate...

Subjects