Assume that the average firm in your company\'s industry is expected to grow at
ID: 2648503 • 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 5%. 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 25% the following year, after which growth should return to the 4% industry average. If the last dividend paid (D0) was $3, 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
k=(D+S)+g
k=(4.5+0.25)+0.4
k=5.15