32. Robotic Atlanta Inc. just paid a dividend of $4.00 per share (that is, D0 =

Question

32. Robotic Atlanta Inc. just paid a dividend of $4.00 per share (that is, D0 = 4.00). The dividends of Robotic Atlanta are expected to grow at a rate of 20 percent next year (that is, g1 = .20) and at a rate of 10 percent the following year (that is, g2 = .10). Thereafter (i.e., from year 3 to infinity) the growth rate in dividends is expected to be 5 percent per year. Assuming the required rate of return on Robotic Atlanta stock is 16 percent, compute the current price of the stock. (Round your answer to 2 decimal places and record your answer without dollar sign or commas).

Explanation / Answer

The value of the stock is the present value of its all dividends and terminal value, which are calculated below:

D1 = $4.00 x 1.20 = $4.8
D2 = $4.8 x 1.10 = $5.28
Terminal Value = ($5.28*1.05)/(0/16-0.05) = $50.4

PV of D1 = $4.8/1.16 = $4.1379
PV of D2 = $5.28/(1.16)2 = $3.9239
PV of terminal value = $50.4/(1.16)3 = $32.2891

Stock Value = $4.1379 + $3.9239 + $32.2891 = $40.3510

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