The Bell Weather Co. is a new firm in a rapidly growing industry. The company is...

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 11% per year for the next 6 years and then decreasing the growth rate to 6% per year forever after. The company just paid its annual dividend in the amount of $1.47 per share. What is the current value of one share if the required rate of return is 10%? ENTER YOUR ANSWER WITH TWO DECIMAL PLACEs (e.g., 12.25). ROUND TO THE NEAREST CENT. DO NOT USE THE DOLLAR SIGN ($) IN YOUR ANSWER.

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Expert Solution

	Required rate=	10.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1.47	11.00%	1.6317		1.6317	1.1	1.4834
2	1.6317	11.00%	1.811187		1.811187	1.21	1.49685
3	1.811187	11.00%	2.01041757		2.01041757	1.331	1.51046
4	2.01041757	11.00%	2.231563503		2.231563503	1.4641	1.52419
5	2.231563503	11.00%	2.477035488		2.477035488	1.61051	1.53804
6	2.477035488	11.00%	2.749509392	72.862	75.61150939	1.771561	42.68
	Long term growth rate (given)=	6.00%			Value of Stock =	Sum of discounted value =	50.23

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year

Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 6 *(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 4 months ago

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