Question

Assume Highline Company has just paid an annual dividend of $1.08. Analysts are predicting an 11.7% per year growth rate in earnings over the next five years. After​ then, Highline's earnings are expected to grow at the current industry average of 5.7% per year. If​ Highline's equity cost of capital is 9.3% per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell?

The value of​ Highline's stock is? ​(Round to the nearest​ cent.)

Answer 1

D1=(1.08*1.117)=1.20636

D2=(1.20636*1.117)=1.34750412

D3=(1.34750412*1.117)=1.5051621

D4=(1.5051621*1.117)=1.68126607

D5=(1.68126607*1.117)=1.8779742

Value after year 5=(D5*Growth rate)/(Equity cost of capital-Growth rate)

=(1.8779742*1.057)/(0.093-0.057)

=55.1394091

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

=1.20636/1.093+1.34750412/1.093^2+1.5051621/1.093^3+1.68126607/1.093^4+1.8779742/1.093^5+55.1394091/1.093^5

=$41.11(Approx)