1. Assume that the average firm in your company\'s industry is expected to grow
ID: 2708152 • Letter: 1
Question
1. Assume that the average firm in your company's industry is expected to grow at a constant rat of 5.8% and its dividend yield is 8.4%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D work that leads you to expect that its earnings and dividends will grow at a rate of 44% this year and 25% the following year, after which growth should match the 5.8% industry average rate. The last dividend paid (D0) was $1.1. What is the value per share of your firm's stock?
Assume that the average firm in your company's industry is expected to grow at a constant rat of 5.8% and its dividend yield is 8.4%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D; work that leads you to expect that its earnings and dividends will grow at a rate of 44% this year and 25% the following year, after which growth should match the 5.8% industry average rate. The last dividend paid (D0) was $1.1. What is the value per share of your firm's stock?Explanation / Answer
Rate of return on stock = 5.8%+8.4% = 14.2%
Dividend in 1 year D1 = 1.1*(1+44%) = 1.58
Dividend in 2 years D2 = 1.58*(1+25%) = 1.98
Dividend in 3 years D3 = 1.98*(1+5.8%) = 2.09
Stock price after 2 years = 2.09 / (14.2%-5.8%) = 24.88
Stock price today = 1.58/(1+14.2%)^1 + 1.98/(1+14.2%)^2 + 24.88/(1+14.2%)^2 = $ 21.98
Hope this helped ! Let me know in case of any queries.
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