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,
the growth rate is expected to drop to 7 percent per year and last
indefinitely. If GRF just paid a $2.00 dividend and the appropriate
discount rate is 15 percent, then what is the value of a share of
GRE?
SOLUTION Excel
Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 25 percent...
Biarritz Corp. is growing quickly. Dividends are expected to
grow at a rate of 25 percent for the next three years, with the
growth rate falling off to a constant 4.5 percent thereafter. If
the required return is 10.5 percent and the company just paid a
dividend of $2.85, what is the current share price? (Do not round
intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.)
Bruin Co. is growing quickly. Dividends are expected to grow at a rate of 25 percent...
Bruin Co. is growing quickly. Dividends are expected to grow at
a rate of 25 percent for the next three years, with the growth rate
falling of to a constant 5 percent thereafter. If the required
return is 15 percent and the company just paid a $7.16 dividend,
what is the share price at the end of supernormal growth
(at Year 3)?
a. 146.84
b. 97.89
c. 75.18
d. 139.84
e. 93.23
Please show solutions using Excel
The ABC Company is expected to have a constant annual growth rate of 5 percent. It...
The ABC Company is expected to have a constant annual growth
rate of 5 percent. It has a price per share of P32 and pays an
expected dividend of P2.40. Its competitor, the DEF Company is
expected to have a growth rate of 10%, has a price per share of
P72, and pays an expected P4.80/share dividend. The required rates
of return on equity for the two companies are:
A. B. C. D.
ABC 13.8% 9.6% 12.5% 16.2%
DEF 15.4%...
Wildhorse, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the...
Wildhorse, Inc., is a fast-growing technology company.
Management projects rapid growth of 30 percent for the next two
years, then a growth rate of 17 percent for the following two
years. After that, a constant-growth rate of 8 percent is expected.
The firm expects to pay its first dividend of $2.45 a year from
now. If dividends will grow at the same rate as the firm and the
required rate of return on stocks with similar risk is 21 percent,...
Ivanhoe, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the...
Ivanhoe, Inc., is a fast-growing technology company. Management
projects rapid growth of 30 percent for the next two years, then a
growth rate of 17 percent for the following two years. After that,
a constant-growth rate of 8 percent is expected. The firm expects
to pay its first dividend of $2.63 a year from now. If dividends
will grow at the same rate as the firm and the required rate of
return on stocks with similar risk is 17 percent,...
Sheridan, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the...
Sheridan, Inc., is a fast-growing technology company. Management
projects rapid growth of 30 percent for the next two years, then a
growth rate of 17 percent for the following two years. After that,
a constant-growth rate of 8 percent is expected. The firm expects
to pay its first dividend of $2.75 a year from now. If dividends
will grow at the same rate as the firm and the required rate of
return on stocks with similar risk is 15 percent,...
Blossom, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the...
Blossom, Inc., is a fast-growing technology company. Management
projects rapid growth of 30 percent for the next two years, then a
growth rate of 17 percent for the following two years. After that,
a constant-growth rate of 8 percent is expected. The firm expects
to pay its first dividend of $2.25 a year from now. If dividends
will grow at the same rate as the firm and the required rate of
return on stocks with similar risk is 15 percent,...
Nonconstant growth: Tre-Bien, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent...
Nonconstant growth: Tre-Bien, Inc., is a
fast-growing technology company. Management projects rapid growth
of 30 percent for the next two years, then a growth rate of 17
percent for the following two years. After that, a constant-growth
rate of 8 percent is expected. The firm expects to pay its first
dividend of $2.45 a year from now. If dividends will grow at the
same rate as the firm and the required rate of return on stocks
with similar risk is...
2. Wildhorse, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for...
2. Wildhorse, Inc., is a fast-growing technology company.
Management projects rapid growth of 30 percent for the next two
years, then a growth rate of 17 percent for the following two
years. After that, a constant-growth rate of 8 percent is expected.
The firm expects to pay its first dividend of $2.35 a year from
now. If dividends will grow at the same rate as the firm and the
required rate of return on stocks with similar risk is 22...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- A neurologist needs to counsel a stroke victim and her husband about possible outcomes, treatment options,...
- Case Study: Personal Beliefs in the Workplace Don Shakow was a prominent professional who worked in...
- 1: Competency framework usage is the modern best practice in management. What is meant by competency...
- A 19.34 g mixture of sugar (C12H22O11) and table salt (NaCl) is dissolved in 231 g...
- Young and Company claims that its pressurized diving bell will, on average, maintain its integrity to...
- 1) Alternative compiled code sequence using instructions in classes A, B, C. What is the average...
- An asset is purchased on January 1 for $48,700. It is expected to have a useful...
ADVERTISEMENT