Question

1. Cullumber Corp. will pay dividends of $5.00, $6.25, $4.75, and $3.00 in the next four years. Thereafter, management expects the dividend growth rate to be constant at 7 percent. If the required rate of return is 21.00 percent, what is the current value of the stock? (Round all intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)

Current value

2.

Cullumber, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a constant-growth rate of 8 percent is expected. The firm expects to pay its first dividend of $2.88 a year from now. If dividends will grow at the same rate as the firm and the required rate of return on stocks with similar risk is 17 percent, what is the current value of the stock? (Round all intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)

Current value

Answer 1

Price of stock = PV of Cash flows from it.

Part 1)

D5 = D4 ( 1 + g )

D5 - Div after 5 Years

D4 - Div after 4 Years

g - Growth Rate

D5 = D4 ( 1 + g )

= $ 3.00 ( 1 + 0.07 )

= $ 3.00 * 1.07

= $ 3.21

P4 = D5 / [ Ke - g ]

= $ 3.21 / [ 21% -7% ]

= $ 3.21 / 14%

= $ 22.93

P4 - Price after 4 Years

D5 - Div after5 Years

Ke - Required Ret

g - Growth Rate

Price Today:

Year	Cash flow	PVF @21%	PV of CFs
1	$      5.00	0.8264	$      4.13
2	$      6.25	0.6830	$      4.27
3	$      4.75	0.5645	$      2.68
4	$      3.00	0.4665	$      1.40
4	$   22.93	0.4665	$   10.70
Price Today			$   23.18

Part 2)

Div calculation:

Year	Cash Flow / Div	Formula	Calculation
1	$                     2.88	Given	Given
2	$                     3.74	D1 ( 1 + g)	2.88 * ( 1 + 0.3 )
3	$                     4.87	D2 ( 1 + g)	3.74 * ( 1 + 0.3 )
4	$                     5.69	D3 ( 1 + g)	4.87 * ( 1 + 0.17 )
5	$                     6.66	D4 ( 1 + g)	5.69 * ( 1 + 0.17 )
6	$                     7.20	D5 ( 1 + g)	6.66 * ( 1 + 0.08 )

Price after 5 Years:

Price of Stock is nothing but PV of CFs from it.
P5 = D6 / [ Ke - g ]
= $ 7.2 / [ 17 % - 8 % ]
= $ 7.2 / [ 9 % ]
= $ 79.95

P5 - Price after 5 Years

D6 - Div after 6 Years

Ke - Required Ret

g - Growth Rate

Price today:

Year	Particulars	Cash Flow	PVF @17 %	Disc CF
1	D1	$      2.88	0.8547	$              2.46
2	D2	$      3.74	0.7305	$              2.74
3	D3	$      4.87	0.6244	$              3.04
4	D4	$      5.69	0.5337	$              3.04
5	D5	$      6.66	0.4561	$              3.04
5	P5	$   79.95	0.4561	$           36.47
Price				$           50.78

Price today is $ 50.78

Present Value Factor:
PVF(r%, n) = 1 / ( 1 + r )^n
r = Int Rate per period
n = No. of periods