A fast-growing firm recently paid a dividend of $0.95 per share. The dividend is

Question

A fast-growing firm recently paid a dividend of $0.95 per share. The dividend is expected to increase at a 20 percent rate for the next four years. Afterwards, a more stable 13 percent growth rate can be assumed.

If a 14.5 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 $0.95 per share. The dividend is expected to increase at a 20 percent rate for the next four years. Afterwards, a more stable 13 percent growth rate can be assumed.

Explanation / Answer

Value of share = dividend paid ( 1 + growth) / ke - g

Here, g = growth , ke = cost of equity

Putting the values , we get

D1.= 0.95 ×1.2 = 1.14

D2 = 1.14 × 1.2 = 1.368

D3 = 1.368 ×1.2 = 1.641

D4 = 1.641 × 1.2 = 1.97

D5 = 1.97 × 1.13 = 2.226

Value per share = D1 /(1+KE) + D2 /(1+KE)2 + D3/(1+ ke)3 + D4/(1+ ke)4 + P1 /(1+ke)4

1.14/ 1.145 + 1.368 / (1.145)2 + 1.641/(1.145)3 + 1.97/(1.145)4 +   { 2.226 / 14.5 - 13%} × 1/(1.145)4

= .995 + 1.043 + 1.093 + 1.146 + 148.4 × .582

= $90.65

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