Agarwal Technologies was founded 10 years ago. It has been profitable for the la
ID: 2349380 • Letter: A
Question
Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value?Explanation / Answer
Po = 0.25 / 1.11^3 + 0.25 * 1.5 / 1.11^4 + 0.25 * 1.5 * 1.25 / 1.11^5 + 0.25 * 1.5 * 1.25 * 1.08 / 1.11^6 * ( summation of the term ( 1.08 / 1.11 )^n for n from 0 to infinity ) .: Po = 0.7080 + 0.25 * 1.5 * 1.25 * 1.08 / 1.11^6 / ( 1 - 1.08 / 1.11 ) Po = $10.72