You are trying to value the stock of Cowbell Inc. You know that the firm only...

You are trying to value the stock of Cowbell Inc. You know that the firm only uses dividends to return cash to its investors and you have forecasted the dividends per share for the next 5 years (see table below). You believe that dividends will continue to grow at a constant rate of 3% each year after year 5 (in perpetuity). The cost of equity is 16%. Given this information, what is the best estimate for the share price for Cowbell Inc? Select one.

Dividend Forecasts
Year	1	2	3	4	5
Dividends per share (in $)	2.50	2.80	2.98	3.08	3.15

	I.	$14.51
	II.	$20.75
	III.	$21.23
	IV.	$9.35
	V.	$19.00

Expert Solution

Value after year 5=(D5*Growth rate)/(Cost of equity-Growth rate)

=(3.15*1.03)/(0.16-0.03)

=$24.9576923

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

=2.5/1.16+2.8/1.16^2+2.98/1.16^3+3.08/1.16^4+3.15/1.16^5+24.9576923/1.16^5

=$21.23(Approx)

jeff jeffy answered 2 years ago

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