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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?

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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 1 year ago
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