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Assume Highline Company has just paid an annual dividend of $1.04. Analysts are predicting an 10.7%

Assume Highline Company has just paid an annual dividend of $1.04. Analysts are predicting an 10.7% 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 4.7% per year. If Highline's equity cost of capital is 7.7% 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 s (Round to the nearest cent.)

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Expert Solution

Current price of stock P0 = Present value of dividends + Present value of its horizon price.

 

Horizon Price , P5 = Dividend of year 5 *(1+g) / ( Ke - g )

 

For Calculating Price of stock we need to discount all the future cash flow from the stock at the required rate.

 

Required Return,Ke

7.70%

      
Constant Growt Rate,g

4.70%

      
Recent Dividend , D0

1.04

   PVF= 1/(1+Ke)^n  
Year,n Dividend Horizon Price PVF at 7.7% PV

1

1.151

  

0.9285

1.0690

2

1.274

  

0.8621

1.0987

3

1.411

  

0.8005

1.1294

4

1.562

  

0.7433

1.1608

5

1.729

60.339

0.6901

42.8339
      Value of Stock

47.29

 

The value of Highline company stock = $47.29.

The value of Highline company stock = $47.29.

Junaid answered 2 years ago
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