A fast growing firm recently paid a dividend of $0.25 per share. The dividend is

Question

A fast growing firm recently paid a dividend of $0.25 per share. The dividend is expected to increase at a 27 percent rate for the next four years. Afterwards, a more stable 10.3 percent growth rate can be assumed.

If a 13.2 percent discount rate is appropriate for this stock, what is its value? (Do not round your intermediate calculations and round your final answer to 2 decimal places. Omit the "$" sign in your response.)

A fast growing firm recently paid a dividend of $0.25 per share. The dividend is expected to increase at a 27 percent rate for the next four years. Afterwards, a more stable 10.3 percent growth rate can be assumed.

Explanation / Answer

Stock Value = D1/(1+r) + D2/(1+r)^2 + D3/(1+r)^3  + D4/(1+r)^4 + (D5/(r-g)/(1+r)^4

Stock Value = 0.25*1.27/1.132 + 0.25*1.27^2/1.132^2 + 0.25*1.27^3/1.132^3 + 0.25*1.27^4/1.132^4 + (0.25*1.27^4*1.103/(13.2%-10.3%))/1.132^4

Stock Value = $ 16.41

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