Two Analysts are independently analyzing the value of Knight, Inc. stock. Knight paid a dividend of...

Two Analysts are independently analyzing the value of Knight, Inc. stock. Knight paid a dividend of $1 last year. Analyst A expects the dividend to grow by 10% in each of the next three years, after which it will grow at a constant rate of 4% per year. Analyst B also expects a temporary growth rate of 10% followed by a constant growth rate of 4%, but he expects the supernormal growth to last for only two years. Analyst A estimates that the required return on Knight stock is 9%, but Analyst B believes the required return is 10%. Analyst B’s valuation of Knight stock is approximately:

A. $5 less than Analyst A’s valuation

B. $5 more than Analyst A’s Valuation

C. $10 less than Analyst A’s Valuation

D. Equal to Analyst A’s Valuation

Expert Solution

Option A is correct

Formulas :

Dn = D(n-1)*(1+g)^n

g = growth rate

n = time period

D = dividend

continuous value = D(n-1)*(1+g) / (K - g)

K = requird return

excel formulas :

jeff jeffy answered 2 years ago

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