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Company XYZ common stock just paid a dividend of $2.00 per share and its dividend is...

Company XYZ common stock just paid a dividend of $2.00 per share and its dividend is expected to grow at 10 percent per year for three years and then grow at 4 percent per year forever. XYZ stocks have a 13 percent required return. You should you be willing to pay?

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Expert Solution

Year t Cash Flow Discounting Factor
[1/(1.13^t)]		 PV of Cash Flow
(cash flow*discounting factor)
1 1 2 + 10% = 2.2 0.884955752 1.946902655
2 2 2.2 + 10% = 2.42 0.783146683 1.895214974
3 3 2.42 + 10% = 2.662 0.693050162 1.844899532
3 3 Terminal Value=
[(2.662+4%)/(13%-4%)]		 30.76088889 0.693050162 21.31883904
Expected Share Price today
=sum of PVs		 27.0058562 = $27.01

jeff jeffy answered 2 years ago
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