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

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 1 year ago

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