a fast-growing firm recently paid a dividend of $0.35 per share. The dividend is

Question

a fast-growing firm recently paid a dividend of $0.35 per share. The dividend is expected to increase at a 10 percent rate for the next three years. Afterwards, a more stable 5percent growth rate can be assumed. If a 6percent discount rate is appropriate for this stock, what is its value today?
Stock value$()
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Consider a firm that had been priced using a 12.5 percent growth rate and a 14.5 percent required return. The firm recently paid a $1.65 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 13.0 percent rate. How much should the stock price change (in dollars and percentage?)
Change in stock price$()
Change in stock percent ()%

Explanation / Answer

First question:

second question:

Calculate the PV of the dividends paid during the supernatural growth period: $ % $ PV factor @6% Present value D1= 0.35 x 1.10 = 0.385 x 0.94339623 = 0.363208 D2= 0.385 x 1.10 = 0.4235 x 0.88999644 = 0.376913 D3= 0.4235 x 1.10 = 0.46585 x 0.83961928 = 0.391137 PV of dividends 0.3632075 + 0.3769135 + 0.391137 = 1.13125768 PV of stock price at the end of Year 3: D4= 0.46585 x 1.05 = 0.489143 P3= D4/(rs-g) Return required(rs)= 6% growth rate(g)= 5% P3= D4/(rs-g) P3= 0.4891425/(0.06-0.05) P3= 48.91425 PV of P3= 48.91425 x 0.8396193 = 41.06935 Sum the two components to find the value of the stock today: Value of current stock (P0) = 1.1312577 + 41.06935 = 42.2006052

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