In: Finance

# The current dividend on an equity share of a company is $3.the present growth rate is... The current dividend on an equity share of a company is$3.the present growth rate is 50%. However, this will decline linearly over a period of 10 years and then stabilize at 12% . What is the intrinsic The value of that company if investors require a return of 16%.

## Solutions

##### Expert Solution

The growth rate in year 1 is 50%. It has to decline to 12% in 10 years. Hence, decline in growth rate per year over next 10 years = (50% - 12%) / 10 = 3.80%

The dividend over next 10 years will be as shown below:

 Time Growth rate Dividend 0 3.00 1 50.00% 4.50 2 46.20% 6.58 3 42.40% 9.37 4 38.60% 12.98 5 34.80% 17.50 6 31.00% 22.93 7 27.20% 29.17 8 23.40% 35.99 9 19.60% 43.05 10 15.80% 49.85 11 12.00% 55.83

Hence, horizon value of all the future dividend from year 11 onward, at the end of year 10 =DHV,10 = D11 / (Ke - g) = 55.83 / ( 16% - 12%) =  1,395.71

Hence,  the intrinsic value of that company = PV of all the dividends over next 10 years + PV of DHV,10 = D1 / (1 + Ke) + D2 / (1 + Ke)2 + D3 / (1 + Ke)3 +.....+ D10 / (1 + Ke)10 + DHV,10 / (1 + Ke)10 = 4.50 /(1 + 16%) + 6.58 / (1 + 16%)2 + 9.37 / (1 + 16%)3 +.....+ 49.85 / (1 + 16%)10 + 1,395.71 / (1 + 16%)10 = $399.99 =$ 400 / share

## Related Solutions

##### Growth​ Company's current share price is $19.85​, and it is expected to pay a$0.90 dividend...
Growth​ Company's current share price is $19.85​, and it is expected to pay a$0.90 dividend per share next year. After​ that, the​ firm's dividends are expected to grow at a rate of 3.7% per year. a. What is an estimate of Growth​ Company's cost of​ equity? b. Growth Company also has preferred stock outstanding that pays a $2.25 per share fixed dividend. If this stock is currently priced at$28.25​, what is Growth​ Company's cost of preferred​ stock? c....
##### Growth​ Company's current share price is $19.85 and it is expected to pay a$1.30 dividend...
Growth​ Company's current share price is $19.85 and it is expected to pay a$1.30 dividend per share next year. After​ that, the​ firm's dividends are expected to grow at a rate of 3.5% per year. a. What is an estimate of Growth​ Company's cost of​ equity? b. Growth Company also has preferred stock outstanding that pays a $1.85 per share fixed dividend. If this stock is currently priced at$28.20​, what is Growth​ Company's cost of preferred​ stock? c....
##### Growth​ Company's current share price is $19.85 and it is expected to pay a$1.05 dividend...
Growth​ Company's current share price is $19.85 and it is expected to pay a$1.05 dividend per share next year. After​ that, the​firm's dividends are expected to grow at a rate of 4.1% per year. a. What is an estimate of Growth​ Company's cost of​ equity? b. Growth Company also has preferred stock outstanding that pays a $1.95 per share fixed dividend. If this stock is currently priced at$27.85​, what is Growth​ Company's cost of preferred​ stock?c. Growth Company...
##### Growth​ Company's current share price is $20.20 and it is expected to pay a$1.00 dividend...
Growth​ Company's current share price is $20.20 and it is expected to pay a$1.00 dividend per share next year. After​ that, the​ firm's dividends are expected to grow at a rate of 3.6% per year. a. What is an estimate of Growth​ Company's cost of​ equity? b. Growth Company also has preferred stock outstanding that pays a $2.30 per share fixed dividend. If this stock is currently priced at$28.15​, what is Growth​Company's cost of preferred​ stock? c. Growth...
##### Growth​ Company's current share price is $20.10 and it is expected to pay a$0.85 dividend...
Growth​ Company's current share price is $20.10 and it is expected to pay a$0.85 dividend per share next year. After​ that, the​ firm's dividends are expected to grow at a rate of 3.5% per year. a. What is an estimate of Growth​ Company's cost of​ equity? b. Growth Company also has preferred stock outstanding that pays a $2.10 per share fixed dividend. If this stock is currently priced at$28.00​, what is Growth​ Company's cost of preferred​ stock? c....
##### What is the value of a stock with current dividend paying $1, a growth rate of... What is the value of a stock with current dividend paying$1, a growth rate of 5% on the dividends, discount rate of 12% that will be held for 5 years and then sold at $18? ##### The Duo Growth Company just paid a dividend of$1.00 per share. The dividend is expected...
The Duo Growth Company just paid a dividend of \$1.00 per share. The dividend is expected to grow at a rate of 23% per year for the next three years and then to level off to 5% per year forever. You think the appropriate market capitalization rate is 18% per year. a. What is your estimate of the intrinsic value of a share of the stock? (Use intermediate calculations rounded to 4 decimal places. Round your answer to 2 decimal...