The earnings of Best Forecasting Company are expected to grow at an annual rate of 14%...

The earnings of Best Forecasting Company are expected to grow at an annual rate of 14% over the next five years and then slow to a constant rate of 10% per year. Best currently pays a dividend of $0.55 per share. What is the value of Best stock to an investor who requires a 16% rate of return? If stock has a market price of $15 do you buy?

Expert Solution

Value of Stock = Present value of dividend till year 5 when growth is extraordinary + Present value of price at the end of year 5 when growth becomes stable

D0 (Dividend currently paid) = $0.55

D1 (Year 1) = $0.55 x (1 + g) = $0.55 x (1 + 0.14) = $0.627

D2 (Year 2) = $0.627 x 1.14 = $0.715

D3 = $0.715 x 1.14 = $0.815

D4 = $0.815 x 1.14 = $0.929

D5 = $0.929 x 1.14 = $1.059

P5 (price at the end of year 5) = [D5 x (1 + g)] / (Ke - g) = [$1.059 x (1 + 0.10)] / (0.16 - 0.10) = $19.415

where, D5 = dividend of year 5, g = stable growth, ke = required return

Value of Stock
Particulars	Year	PVF@16%	Amount	Present Value
D1	1	0.862	$0.627	$0.540
D2	2	0.743	$0.715	$0.531
D3	3	0.641	$0.815	$0.522
D4	4	0.552	$0.929	$0.513
D5	5	0.476	$1.059	$0.504
P5	5	0.476	$19.415	$9.242
*Total*				$11.852

If the market price if $15, you would not want to buy as the stock has a value of only $11.852 and is overpriced.

jeff jeffy answered 2 years ago

1. The earnings of Best Forecasting Company are expected to grow at an annual rate of...

1. The earnings of Best Forecasting Company are expected to grow at an annual rate of 14% over the next 5 years and then slow to a constant rate of 10% per year. Best currently pays a dividend of $0.36 per share. What is the value of Best stock to an investor who requires a 16% rate of return? If stock has a market price of $15 do you buy? Please include the excel formulas.

The earnings and dividends of Ned Computer Co. are expected to grow at an annual rate...

The earnings and dividends of Ned Computer Co. are expected to grow at an annual rate of 15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year. Ned currently pays a dividend of $1 per share. What is the value of Ned stock to an investor who requires a 12 percent rate of return? Hints: 1) Calculate dividend for year 1 ~ 4 2) Terminal value at the end of...

Suppose that a company pays annual dividends that are expected to grow at a constant rate...

Suppose that a company pays annual dividends that are expected to grow at a constant rate of 6% per year forever. The company just paid a dividend of $2. If the market requires an annual return of 14% on this stock, what should we expect the price to be in 5 years?

Best Foods Corp. expects earnings and dividends to grow at a rate of 25% for the...

Best Foods Corp. expects earnings and dividends to grow at a rate of 25% for the next 4 years. After that period, the growth rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?

Shell is experiencing rapid growth. Earnings and dividends are expected to grow at a rate of...

Shell is experiencing rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next 2 years, at 13% the following year, and at a constant rate of 6% during Year 4 and thereafter. Its last dividend was $1.15, and its required rate of return is 12%. b) Find the PV of the firm’s stock price at the end of Year 3. f) Calculate the dividend and capital gains yields for Years 1, 2, and...

Firm AAA's earnings and dividends are expected to grow by a rate of 0.04 a year....

Firm AAA's earnings and dividends are expected to grow by a rate of 0.04 a year. This growth will stop after year 4. In year 5 and later, it will pay out all earnings as dividends. Assume next year's dividend is 2, the cost of capital is 0.08, and next year's EPS is 12. What is AAA's stock price today? Round your answer to 2 decimal places.

Company ABC's earnings per share this year are $5. ABC's earnings are expected to grow at...

Company ABC's earnings per share this year are $5. ABC's earnings are expected to grow at rate g every year. The return that investors expect on ABC is 10%. ABC's current (ex-dividend) stock price is $80. ABC's payout ratio is 0.4. (a) Determine rate g. (b) Determine the present value of ABC's growth opportunities.

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

Zeta Inc. expects earnings dividends to 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% per year indefinitely. If current dividend is $2 per share and investors require a 16% annual return on Vega stock, what is a fair price for a share of Vega's stock today? In excel please. thank you.

The dividends of CMC Ltd are expected to grow at a constant annual rate over the...

The dividends of CMC Ltd are expected to grow at a constant annual rate over the foreseeable future. The company has recently paid a dividend per share of $1.00, and the required rate of return on the shares is 10% p.a. Based on this information, the current price of the shares has been estimated at $25.00. The constant annual growth rate in dividends that is implied by this information is closest to:

Assume a company you are analyzing is expected to grow its earnings and dividends at a...

Assume a company you are analyzing is expected to grow its earnings and dividends at a constant rate in the foreseeable future (forever). How will you find the intrinsic value of your stock? This answer requires multiple steps and concepts

Question