A fast-growing firm recently paid a dividend of $0.80 per share. The dividend is

Question

A fast-growing firm recently paid a dividend of $0.80 per share. The dividend is expected to increase at a 20 percent rate for the next four years. Afterwards, a more stable 12 percent growth rate can be assumed.

If a 13.5 percent discount rate is appropriate for this stock, what is its value? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

A fast-growing firm recently paid a dividend of $0.80 per share. The dividend is expected to increase at a 20 percent rate for the next four years. Afterwards, a more stable 12 percent growth rate can be assumed.

Explanation / Answer

Hi,

Please find the detailed answer as follows

Value of the Stock = .80*(1+20%)/(1+13.50%)^1 + .80*(1+20%)^2/(1+13.50%)^2 + .80*(1+20%)^3/(1+13.50%)^3 + .80*(1+20%)^4/(1+13.50%)^4 + .80*(1+20%)^4*(1+12%)/(1+13.50%)^4*(13.50%-12%) = $78.32

Answer is $78.32

Thanks.

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