The Bell Weather Co. is a new firm in a rapidly growing industry. The company is
ID: 1172624 • Letter: T
Question
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 19 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $2.60 per share. What is the current value of one share of this stock if the required rate of return is 8.10 percent?
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 19 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $2.60 per share. What is the current value of one share of this stock if the required rate of return is 8.10 percent?
Explanation / Answer
D1=(2.6*1.19)=$3.094
D2=(3.094*1.19)=$3.68186
D3=(3.68186*1.19)=$4.3814134
D4=(4.3814134*1.19)=$5.213881946
Value after year 4=(D4*Growth rate)/(Required return-Growth rate)
=(5.213881946*1.03)/(0.081-0.03)
=$105.2999687
Hence current share price=Future dividends*Present value of discounting factor(8.1%,time period)
=$3.094/1.081+$3.68186/1.081^2+$4.3814134/1.081^3+$5.213881946/1.081^4+$105.2999687/1.081^4
which is equal to
=$90.41(Approx).
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.