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.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

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