Question
In: Finance
Growing Real Fast Company (GRF) is expected to have a 25 percent growth rate for the...
Growing Real Fast Company (GRF) is expected to have a 25 percent
growth rate for the next four years (affecting D1, D2, D3, and D4).
Beginning in year five, the growth rate is expected to drop to 2.4
percent per year and last indefinitely. If GRF just paid a $4.00
dividend and the appropriate discount rate is 17.5 percent, then
what is the value of a share of GRF? Enter your answer to two
decimal places.
Solutions
Expert Solution
|
Dividend Just paid (D0) = |
4 | ||||
|
Growth rate for 4 Years = |
25% | or 0.25 | |||
|
Growth rate after 4th Year = |
2.4% or | 0.024 | |||
|
So, D1 = (4 +25%) = |
5 | ||||
|
D2 = (5 +25%) = |
6.25 | ||||
|
D3 = (6.25 +25%) = |
7.8125 | ||||
|
D4 = (7.8125 + 25%) = |
9.765625 | ||||
|
D5 = (9.765625 +2.4%)= |
10 | ||||
|
Discount rate = |
17.5% or | 0.175 | |||
|
Value of stock at end of 4th Year |
|||||
|
Formula for P4 = D5/(ke-g) |
|||||
|
P4 = 10/(0.175 - 0.024) |
|||||
| 66.22516556 | |||||
|
Present value of stock |
|||||
|
Present value of stock is Present value of Dividends upto 4th yar and Present value of stock value at end of 4th year. |
|||||
| Year | Cash flows | P.V.F. @ 17.5% |
Present value |
||
| 1 | D1 | 5 | 0.8510638298 | 4.255319149 | |
| 2 | D2 | 6.25 | 0.7243096424 | 4.526935265 | |
| 3 | D3 | 7.8125 | 0.6164337382 | 4.81588858 | |
| 4 | D4 | 9.765625 | 0.524624458 | 5.123285723 | |
| 4 | P4 | 66.22516556 | 0.524624458 | 34.74334159 | |
| 53.46477031 | |||||
|
So, Value of a share of GRF is $53.46. |
|||||
|
Please thumbs up. |
jeff jeffy answered 1 year agoRelated Solutions
Growing Real Fast Company (GRF) is expected to have a 25 percent growth rate for the...
Growing Real Fast Company (GRF) is expected to have a 25 percent
growth rate for the next four years (effecting D1,
D2, D3, and D4). Beginning in year five,
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