Dunder Mifflin will pay its first dividend of $4.35 per share in eight years. They expect...

Dunder Mifflin will pay its first dividend of $4.35 per share in eight years. They expect to grow the dividend at 10% per year afterward. If you require a return of 18%, what is the most you would be willing to pay for the stock today?

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Expert Solution

	Required rate=	18.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	0		0	1.18	0
2	0	0.00%	0		0	1.3924	0
3	0	0.00%	0		0	1.643032	0
4	0	0.00%	0		0	1.93877776	0.00
5	0	0.00%	0		0	2.287757757	0.00
6	0	0.00%	0		0	2.699554153	0
7	0	0.00%	0		0	3.185473901	0
8	0	0.00%	4.35	59.813	64.163	3.758859203	17.06981
	Long term growth rate (given)=	10.00%			Value of Stock =	Sum of discounted value =	17.07

Where
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 8 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

jeff jeffy answered 8 months ago

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