iBek that entitles its owners to regular, fixed dividend payments in perpetuity.
ID: 2821590 • Letter: I
Question
iBek that entitles its owners to regular, fixed dividend payments in perpetuity. The valuation equation is simply the current dividend divided by the required rate of return. Quantitative Problem 2: Carlysle Corporation has perpet of $1.30 at the end of each year. If investors requi perpetual preferred stock ual preferred stock outstanding that pays a constant annual dividend re an 9% return on the preferred stock, what is the price of the firm's ? Round your answer to the nearest cent. Do not round intermediate calculations. per share Show All Feedback Nonconstant Growth Stocks: For many companies, it is not appropriate to assume that dividends will grow at a constant rate. Most firms go through life cycles where they experience different growth rates during different parts of the cycle. For valuing these firms, the generalized valuation and the constant growth equations are combined to arrive at the nonconstant growth valuation equation: Basically, this equation calculates the present value of dividends received during the nonconstant growth period and the present value of the stock's horizon value, which is the value at the horizon date of all dividends expected thereafter. Quantitative Problem 3: Assume today is December 31, 2017. Imagine Works Inc. just paid a dividend of $1.35 per share at the end of 2017. The dividend is expected to grow at 18% per year for 3 years, after which time it is expected to grow at a constant rate of 5% annually. The company's cost of equity (n) is 10%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company's stock today (December 31, 2017)2 Round your answer to the nearest cent. Do not round intermediate calculations. | per shareExplanation / Answer
1)
Price of preferred stock = Annual dividend / required rate of return
Price of preferred stock = 1.3 / 0.09
Price of preferred stock =$14.4
2)
Year 1 dividend = 1.35 * 1.18 = 1.593
Year 2 dividend = 1.593 * 1.18 = 1.87974
Yaer 3 dividend = 1.87974 * 1.18 = 2.218093
Yaer 4 dividend = 2.218093 * 1.05 = 2.328998
Price at year 3 = D1 / k - g
Price at year 3 = 2.328998 / 0.1 - 0.05
Price at year 3 = $46.57996
Price of company's stock = 1.593 / ( 1 + 0.1)1 + 1.87974 / ( 1 + 0.1)2 + 2.218093 / ( 1 + 0.1)3 + 46.57996 / ( 1 + 0.1)3
Price of company's stock = $39.7
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