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%.

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 =D_HV,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 D_HV,10 = D1 / (1 + Ke) + D2 / (1 + Ke)² + D3 / (1 + Ke)³ +.....+ D10 / (1 + Ke)¹⁰ + D_HV,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

jeff jeffy answered 1 year ago

A company just paid a $2 dividend per share. The dividend growth rate is expected to...

A company just paid a $2 dividend per share. The dividend growth rate is expected to be 10% for each of the next 2 years, after which dividends are expected to grow at a rate of 3% forever. If the company’s required return (rs) is 11%, what is its current stock price?

1.) XYZ Corporation's next dividend is expected to be $3 per share. Dividend growth rate has...

1.) XYZ Corporation's next dividend is expected to be $3 per share. Dividend growth rate has been at 2% and expected to be so into the future. If investor's return is 10%, calculate the stock price next year. A) 37.50 B) 38.25 C) 38.50 D) 38.75 E) None of the above Which of the following typically applies to preferred stock but not to common stock? A) Par Value B) Dividend yield C) Cumulative dividends D) It is legally considered equity...

Assume that a company just paid a dividend of $2 per share. The expected growth rate...

Assume that a company just paid a dividend of $2 per share. The expected growth rate in the dividend is a constant 10%. If your required rate of return for the stock is 15%, what is the value of the stock to you today?

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, thefirm'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 GrowthCompany'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...

Question