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Combined Communications is a new firm in a rapidly growing industry. The company is planning on...

Combined Communications is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 23 percent a year for the next 4 years and then decreasing the growth rate to 5 percent per year. The company just paid its annual dividend in the amount of $1.30 per share. What is the current value of one share of this stock if the required rate of return is 9.00 percent?

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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 1.3 23.00% 1.599 1.599 1.09 1.467
2 1.599 23.00% 1.96677 1.96677 1.1881 1.65539
3 1.96677 23.00% 2.4191271 2.4191271 1.295029 1.86801
4 2.4191271 23.00% 2.975526333 78.108 81.08352633 1.41158161 57.44161
Long term growth rate (given)= 5.00% Value of Stock = Sum of discounted value = 62.43
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 4 *(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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