LeoTech Inc. just paid a dividend of $12 to its stockholders. The dividend will grow at...

LeoTech Inc. just paid a dividend of $12 to its stockholders. The dividend will grow at 7% over the next 7 years. After 7 years, the dividends will remain constant forever. If the discount rate is 4%, what is the value of LeoTech’s stock today?

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Expert Solution

The value of LeoTech’s stock today is computed as shown below:

= Dividend in year 1 / (1 + discount rate )¹ + Dividend in year 2 / (1 + discount rate )² + Dividend in year 3 / (1 + discount rate )³ + Dividend in year 4 / (1 + discount rate )⁴ + Dividend in year 5 / (1 + discount rate )⁵ + Dividend in year 6 / (1 + discount rate )⁶ + Dividend in year 7 / (1 + discount rate )⁷ + 1 / (1 + discount rate )⁷ [ ( Dividend in year 8 / discount rate) ]

= ( $ 12 x 1.07 ) / 1.04¹ + ( $ 12 x 1.07² ) / 1.04² + ( $ 12 x 1.07³ ) / 1.04³ + ( $ 12 x 1.07⁴ ) / 1.04⁴ + ( $ 12 x 1.07⁵ ) / 1.04⁵ + ( $ 12 x 1.07⁶ ) / 1.04⁶ + ( $ 12 x 1.07⁷ ) / 1.04⁷ + 1 / 1.07⁷ x [ ( $ 12 x 1.07⁷ ) / 0.04 ]

= $ 12.84 / 1.04 + $ 13.7388 / 1.04² + $ 14.700516 / 1.04³ + $ 15.72955212 / 1.04⁴ + $ 16.83062077 / 1.04⁵ + $ 18.00876422 / 1.04⁶ + $ 19.26937772 / 1.04⁷ + $ 481.7344429 / 1.04⁷

= $ 460.35 Approximately

Feel free to ask in case of any query relating to this question

jeff jeffy answered 1 year ago

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