12. Twenty years ago, Elle Inc. began manufacturing and selling coin-operated ar

Question

12. Twenty years ago, Elle Inc. began manufacturing and selling coin-operated arcade games. Dividends are currently $5.50 per share, having grown at a 8 percent compound annual rate over the past 12 years. That growth rate is expected to be maintained for the next 2 years, after which dividends are expected to grow at half that rate for 2 years. Beyond that time, Elle's dividends are expected to grow at 2 percent per year. What is the current value of a share of Elle common stock if your required rate of return is 12%?

Explanation / Answer

Terminal value at year 4 = 6.94 (1+.02) /(.12 -.02)

                                    = 7.08 / .10

                                    = $ 70.80

year Dividend present value @12% present value of dividend 1 5.94     [5.50(1+.08)] .89286 5.30 2 6.42     [5.94(1+.08)] .79719 5.12 3 6.68     [6.42(1+.04)] .71178 4.75 4 6.94     [6.68(1+.04)] .63552 4.41 4 70.80 .63552 44.99 current value of share 64.57

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.