A7X Corp. just paid a dividend of $1.20 per share. The dividends are expected to
ID: 2772678 • Letter: A
Question
A7X Corp. just paid a dividend of $1.20 per share. The dividends are expected to grow at 15 percent for the next eight years and then level off to a growth rate of 5 percent indefinitely. If the required return is 10 percent, what is the price of the stock today?
A7X Corp. just paid a dividend of $1.20 per share. The dividends are expected to grow at 15 percent for the next eight years and then level off to a growth rate of 5 percent indefinitely. If the required return is 10 percent, what is the price of the stock today?
Explanation / Answer
Price of the stock is the present value of the future cash flows. Following table computes the current price of the given stock.
Dividend from 8 onwards is the present value of all future Dividends in the year 8 and is computed as below.
Dividend in the year 8 = (3.67 x 1.05)/(0.10 - 0.05) = $77.09
Year Dividend PVF @ 10% Present Value 1 1.38 0.909 1.25 2 1.59 0.826 1.31 3 1.83 0.751 1.37 4 2.10 0.683 1.43 5 2.41 0.621 1.50 6 2.78 0.564 1.57 7 3.19 0.513 1.64 8 3.67 0.467 1.71 8 onwards 77.09 0.467 35.96 Stock Price 47.75Related Questions
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