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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


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