Best Buy has just paid a dividend of $4 per share (this dividend is already paid...

Best Buy has just paid a dividend of $4 per share (this dividend is already paid therefore it is not included in the current price). The companys dividend is estimated to grow at a rate of 35% in year 1 and 20% in year 2. The dividend is then expected to grow at a constant rate of 3.2% thereafter. The companys opportunity cost of capital is 12% what is the current value of Best Buy stock?

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Answer:

Dividend in year 1 = D0(1+G)

= 4*(1+.35)

= 5.4

Dividend in year 2= 5.4(1+.20) = 6.48

Terminal value at year 2 = D2(1+g)/(Rs-g)

= 6.48 (1+.032)/(.12-.032)

= $ 75.9927

current value = [PVF12%,1*D1]+[PVF12%,2*D2]+[PVF12%,2*Terminal value]

=[ .89286*5.4]+[.79719*6.48]+[.79719*75.9927]

=$ 70.5679

~ 70.57

jeff jeffy answered 1 year ago

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