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Ten years ago, Matel Inc. Toys began manufacturing and selling games for sports bars. Dividends are...

Ten years ago, Matel Inc. Toys began manufacturing and selling games for sports bars. Dividends are currently $2.04 per share, having grown at a 12.00 percent compound annual rate over the past 5 years. That growth rate is expected to be maintained for the next 2 years, after which dividends are expected to grow at half that rate for 3 years. Beyond that time, Matel's dividends are expected to grow at 5.00 percent per year. What is the current value of a share of Matel's common stock if your required return is 22.00 percent?

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Expert Solution

Year Growth rate Dividend computation Dividend PV factor @22%, 1/(1+r)^time Dividend * PV factor
1 12.00% 2.04*(1+12%) $      2.28                          0.8197 $           1.87
2 12.00% 2.28*(1+12%) $      2.56                          0.6719 $           1.72
3 6.00% 2.56*(1+6%) $      2.71                          0.5507 $           1.49
4 6.00% 2.71*(1+6%) $      2.88                          0.4514 $           1.30
5 6.00% 2.88*(1+6%) $      3.05                          0.3700 $           1.13
5 $   18.82                          0.3700 $           6.97
Current share price $         14.48
Current Dividend $            3.05
Rate of return 22.00%
Growth Rate 5.00%
Share Price at the horizon i.e. T5 =Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Share Price at the horizon i.e. T5 =3.047781359616*(1+0.05)/(0.22-0.05)
Share Price at the horizon i.e. T5 $          18.82
Current share price $          14.48 FROM above table

jeff jeffy answered 2 years ago
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