Orange Company dividends will grow at 8% during the next 4 years, 7% during year 5,...

Orange Company dividends will grow at 8% during the next 4 years, 7% during year 5, after that they will grow at a 6%. Last year dividend was $1.50. The risk-free rate of return is 4% and the risk premium is 5% What is the value of the stock? Please show calculations

Expert Solution

Risk-free rate	4%
Risk premium	5%
Cost of capital	Risk-free rate + Risk premium
Cost of capital	4%+5%
Cost of capital	9.00%


Year	Growth rate	Dividend computation	Dividend	PV factor @9%, 1/(1+r)^time	Dividend * PV factor
1	8.00%	1.5*(1+8%)	$ 1.62	0.9174	$ 1.49
2	8.00%	1.62*(1+8%)	$ 1.75	0.8417	$ 1.47
3	8.00%	1.75*(1+8%)	$ 1.89	0.7722	$ 1.46
4	8.00%	1.89*(1+8%)	$ 2.04	0.7084	$ 1.45
5	7.00%	2.04*(1+7%)	$ 2.18	0.6499	$ 1.42
5			$ 77.15	0.6499	$ 50.14
				Current share price	$ 57.43

Current Dividend	$ 2.18
Rate of return	9.00%
Growth Rate	6.00%

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	=2.1835847808*(1+0.06)/(0.09-0.06)
Share Price at the horizon i.e. T5	$ 77.15

jeff jeffy answered 1 year ago

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