Assume that the average firm in your company\'s industry is expected to grow at
ID: 2638800 • Letter: A
Question
Assume that the average firm in your company's industry is expected to grow at a constant rate of 4% and that its dividend yield is 7%. 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 20% the following year, after which growth should return to the 4% industry average. If the last dividend paid (D0) was $1.25, 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
Hi,
Please find the detailed answer as follows:
Cost of Capital = Growth Rate + Dividend Yield = 4 + 7 = 11%
Current Value = 1.25*(1+.50)/(1+11%)^1 + 1.25*(1+.50)*(1+.20)/(1+11%)^2 + 1.25*(1+.50)*(1+.20)*(1+.04)/(1+11%)^2*(.11% - 4%) = $30.65 or $30.7
Answer is $30.65 or $30.7
Thanks.