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Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years,...
Agarwal Technologies was founded 10 years ago. It has been
profitable for the last 5 years, but it has needed all of its
earnings to support growth and thus has never paid a dividend.
Management has indicated that it plans to pay a $0.25 dividend 3
years from today, then to increase it at a relatively rapid rate
for 2 years, and then to increase it at a constant rate of 8.00%
thereafter. Management's forecast of the future dividend stream,
along with the forecasted growth rates, is shown below. Assuming a
required return of 11.00%, what is your estimate of the stock's
current value?
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| Growth rate | NA | NA | NA | NA | 30.00% | 15.00% | 8.00% |
| Dividends | $0.000 | $0.000 | $0.000 | $0.250 | $0.325 | $0.374 |
$0.404 |
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Expert Solution
| rate | 11.0000% | |
| Cash flows | Year | Discounted CF= cash flows/(1+rate)^year |
| - | 0 | - |
| - | 1 | - |
| - | 2 | - |
| 0.250 | 3 | 0.18 |
| 0.325 | 4 | 0.21 |
| 0.374 | 5 | 0.22 |
| 13.464 | 5 | 7.99 |
the terminal value = 0.374*1.08/(0.11 - 0.08) = 13.464
total stock value = sum of column 3 = 8.61
jeff jeffy answered 3 years agoRelated Solutions
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