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Sheridan, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the...

Sheridan, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a constant-growth rate of 8 percent is expected. The firm expects to pay its first dividend of $2.75 a year from now. If dividends will grow at the same rate as the firm and the required rate of return on stocks with similar risk is 15 percent, what is the current value of the stock? (Round all intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)

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Expert Solution

The stock value is the present value of all expected future dividends. The first five dividends can be calculated using the growth rates 30% and 17%. Year six on wards, the present value of dividends can be calculated using the present value formula of a growing perpetuity. The sum of these 2 present values is the current stock value. Calculations are as shown below:

Therefore, the current stock value is $63.22

Formulas used in excel are as shown:

jeff jeffy answered 1 year ago
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