1. Assume that the average firm in your company\'s industry is expected to grow

Question

1. Assume that the average firm in your company's industry is expected to grow at a constant rate of 5% and that its dividend yield is 7%. 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 50% [D1 = D0(1 + g) = D0(1.50)] this year and 20% the following year, after which growth should return to the 5% industry average. If the last dividend paid (D0) was $1.75, what is the value per share of your firm's stock? Round your answer to the nearest cent. Do not round your intermediate computations.

Explanation / Answer

here the discount factor(k) is 7%

=d1/(1+k)^1+d2/(1+k)^2+....

terminal vlaue= d2*(1+g)/(k-g)]/(1+k)^2

=[1.75*(1.5)/1.07^1]+[1.75*1.5*1.2/1.07^2]+[1.75*1.5*1.2*1.05/(7%-5%)]/1.07^2

=$149.65

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