Hot Wings, Inc. has just paid a dividend of $2 per share and has announced that...

Hot Wings, Inc. has just paid a dividend of $2 per share and has announced that it will increase the dividend by $1.5 per share for each of the next 5 years, and then will increase the dividend at a constant growth rate of 5% a year forever. If you want a return of 9 percent per year, how much will you pay for the stock?

Expert Solution

we have to use dividend discount model to compute the terminal value
Price today is the present value of future cash flow

i	ii	iii=i+ii	iv	v	vi=iv*v
year	Dividend	Terminal value	total cash flow	PVIF @ 9%	present value
1	3.5000		3.50	0.9174	3.21
2	5.0000		5.00	0.8417	4.21
3	6.5000		6.50	0.7722	5.02
4	8.0000		8.00	0.7084	5.67
5	9.5000	249.38	258.88	0.6499	168.25


Price =					186.36

Terminal value = Divided in year 6/(required rate - growth rate)
		9.5*105%/(9%-5%)
		249.375

Price today =				$ 186.36

jeff jeffy answered 2 years ago

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