.Suppose Footlocker’s Inc. Will pay dividends of $ 5, $7, $12, $9 for first four years...

.Suppose Footlocker’s Inc. Will pay dividends of $ 5, $7, $12, $9 for first four years respectively. Then it grows at the rate of 11 percent for next three years. Then it grows at the rate of 6 percent for next three years. What value you will place on this stock if investor requires nine percent return over the period?

Solutions

Expert Solution

	Required rate=	9.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	5		5	1.09	4.5872
2	5	0.00%	7		7	1.1881	5.89176
3	7	0.00%	12		12	1.295029	9.2662
4	12	0.00%	9		9	1.41158161	6.37583
5	9	11.00%	9.99		9.99	1.538623955	6.49281
6	9.99	11.00%	11.0889		11.0889	1.677100111	6.61
7	11.0889	11.00%	12.308679	434.907	447.215679	1.828039121	244.64229
	Long term growth rate (given)=	6.00%			Value of Stock =	Sum of discounted value =	283.87

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 7 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

jeff jeffy answered 1 year ago

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