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Sprockley Company has just paid a $1 per share dividend. It is expected that dividends will...

Sprockley Company has just paid a $1 per share dividend. It is expected that dividends will grow at 16% per year for the next 2 years, at 10% the third year and 8% in year 4. After that, dividend growth is expected to be 3% per year forever. Sprockley’s equity ? is 0.9. If Treasury bills yield 5% and the market risk premium is 8.3%, what should be Sprockley’s current stock price?

$10.00
$12.05
$15.00
$42.00
$45.75

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Expert Solution

required return = 5% + 0.9*8.3% = 12.47%

rate 12.4700%
Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow
                            -   0                                            -                                           -  
                     1.160 1                                        1.03                                    1.03
                     1.346 2                                        1.06                                    2.10
                     1.480 3                                        1.04                                    3.14
                     1.599 4                                        1.00                                    4.13
                   17.387 4                                     10.87                                  15.00

Current price = 15.00

jeff jeffy answered 2 years ago
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