Problem 7-12 Nonconstant Growth Stock Valuation Assume that the average firm in
ID: 2622360 • Letter: P
Question
Problem 7-12
Nonconstant Growth Stock Valuation
Assume that the average firm in your company's industry is expected to grow at a constant rate of 5% and that its dividend yield is 8%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D work that leads you to expect that its earnings and dividends will grow at a rate of 50% [D1 = D0(1 + g) = D0(1.50)] this year and 30% the following year, after which growth should return to the 5% industry average. If the last dividend paid (D0) was $2, what is the value per share of your firm's stock? Round your answer to the nearest cent. Do not round your intermediate computations.
$
Explanation / Answer
value per share = 2 * (1.5)/ ( 1 + 0.08) + 2 * (1.5) * (1.3) / ( 1 + 0.08)^2 + 2 * (1.5)* (1.3) / ( 0.08 - 0.05) *( 1 + 0.08)^2
= 2.77778 + 3.34362 + 111.4540466 = 117.57