Zeta Inc. expects earnings dividends to to grow at an annual rate of 20,15, and 10...

Zeta Inc. expects earnings dividends to to grow at an annual rate of 20,15, and 10 percent respectively over the next three years after which the company settles into a constant growth pattern of 5% per year indefinitely. If current dividend is $2 per share and investors require a 16% annual return on Vega stock, what is a fair price for a share of Vega's stock today? In excel please. thank you.

Expert Solution

Ans:- Current Price (P0) of share is calculated by D1/(rs - g), where D1 is the next dividend to be paid, rs is the required rate of return and g is the growth rate. D1=D0*(1+g), where D0 is the current dividend and g is the growth rate.

To find the current share price of the stock we need to find the present value of all the future cash flows and then add them all to get the current share price.

Market Price at year 3 is calculated by Dividend 4 / (rs-g).

Therefore, the fair price or current market price of the stock is approx $24.63.

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jeff jeffy answered 2 years ago

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