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The forecasted dividend per share in 2019 (it is 2011 in the case) is $1.21. If...

The forecasted dividend per share in 2019 (it is 2011 in the case) is $1.21. If the dividend per share is expected to grow by 6% each year over the period 2020 to 2024, and stabilizes to 3% each year forever, determine the following:

B) the true price of the stock.

Based on CAPM-Cost of equity = 7.01%

Solutions

Expert Solution

Discount rate 7.0100%
3.24 Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow
                               -   0                                            -                                           -  
                        1.210 1                                        1.13                                    1.13
                        1.283 2                                        1.12                                  2.251
                        1.360 3                                        1.11                                  3.360
                        1.441 4                                        1.10                                    4.46
                        1.528 5                                        1.09                                    5.55
                        1.619 6                                        1.08                                    6.63
                     41.592 6                                     27.70                                  34.33

terminal value = 1.619*1.03/(0.071 - 0.03) = 41.592; price = 34.33

jeff jeffy answered 5 months ago
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