Question

Growing Real Fast Company (GRF) is expected to have a 25 percent growth rate for the next four years (effecting D1, D2, D3, and D4). Beginning in year five, the growth rate is expected to drop to 7 percent per year and last indefinitely. If GRF just paid a $2.00 dividend and the appropriate discount rate is 15 percent, then what is the value of a share of GRE?

SOLUTION Excel

Answer 1

We will be using the dividend discount model to arrive at the instrinsic value of GRE
The instrinsic value of equity is equal to the present value of the dividends expected from the company
Following information is provided :
Dividend paid	$2
Calculation of dividend expected
Year	Growth rate	Dividend Amt (formula)	Dividend Amt.
1	25%	=2*(1+0.25)	2.50
2	25%	=D256*(1+C257)	3.13
3	25%	=D257*(1+C258)	3.91
4	25%	=D258*(1+C259)	4.88
5	7%	=D259*(1+C260)	5.22
The growth rate will be 7% thereafter indifintely
Hence, the Terminal Value (TV) in year 5 = Dividend expected next year/ (Discount rate - growth rate)
=(5.22*1.07)/(0.15-0.07)
69.82
Calculation of equity of the company
We will discount all the dividends and the terminal value by 15% to arrive at the present value, which will be the intrinsic value of equity
Year	Dividend/TV	DF @ 15% (formula)	DF @ 15%	PV = Dividend & TV * DF
1	2.50	=1/(1.15)^1	0.870	2.174
2	3.13	=1/(1.15)^2	0.756	2.363
3	3.91	=1/(1.15)^3	0.658	2.568
4	4.88	=1/(1.15)^4	0.572	2.792
5	5.22	=1/(1.15)^5	0.497	2.598
5	69.82	=1/(1.15)^5	0.497	34.713					jeff jeffy Next > < Previous Related Solutions Growing Real Fast Company (GRF) is expected to have a 25 percent growth rate for the... Growing Real Fast Company (GRF) is expected to have a 25 percent growth rate for the next four years (affecting D1, D2, D3, and D4). Beginning in year five, the growth rate is expected to drop to 2.4 percent per year and last indefinitely. If GRF just paid a $4.00 dividend and the appropriate discount rate is 17.5 percent, then what is the value of a share of GRF? Enter your answer to two decimal places. Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 25 percent... Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next three years, with the growth rate falling off to a constant 4.5 percent thereafter. If the required return is 10.5 percent and the company just paid a dividend of $2.85, what is the current share price? 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