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ABC Corp. just paid a dividend of $1.40 per share. The dividends are expected to grow...

ABC Corp. just paid a dividend of $1.40 per share. The dividends are expected to grow at 25 percent for the next 7 years and then level off to a 7 percent growth rate indefinitely. If the required return is 15 percent, what is the price of the stock today?

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Expert Solution

Price is calculated as follows:

Year CF Discount Factor Discounted CF
1 $   1.75 1/(1+0.15)^1= 0.869565217 0.869565217391304*1.75=     1.52
2 $   2.19 1/(1+0.15)^2= 0.756143667 0.756143667296787*2.1875=     1.65
3 $   2.73 1/(1+0.15)^3= 0.657516232 0.657516232431988*2.734375=     1.80
4 $   3.42 1/(1+0.15)^4= 0.571753246 0.571753245593033*3.41796875=     1.95
5 $   4.27 1/(1+0.15)^5= 0.497176735 0.49717673529829*4.2724609375=     2.12
6 $   5.34 1/(1+0.15)^6= 0.432327596 0.432327595911556*5.340576171875=     2.31
7 $   6.68 1/(1+0.15)^7= 0.37593704 0.375937039923093*6.67572021484375=     2.51
7 $89.29 1/(1+0.15)^7= 0.37593704 0.375937039923093*89.2877578735352= 33.57
Price= Sum of all Discounted CF 47.44

So the price is $47.44

jeff jeffy answered 1 year ago
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