Assume that the average firm in your company\'s industry is expected to grow at
ID: 2680047 • Letter: A
Question
Assume that the average firm in your company's industry is expected to grow at a constant rate of 6% and that its divident yield is 7%. Your company is about as risky as the average firm in the industry, but it has just sueccessfully completed some R&D work that leads you to expect that its eranings and dividends will grow at a rate of 50% [D1= D0 (1.50)] this year and 25% the following year, after which growth should return to the 6% industry average. If the last divident paid was $1 [D0], what is the value per share of your firm's stock?Explanation / Answer
The Required Rate of Return in the industry is 13%, i.e. 7% Div Yield + 6% Constant Growth Your company - Next Div at T1 = 1.50, at T2 = 1.88, at T3 = 1.99 PV of 1.50, N 1, R 13% = 1.33 PV of 1.88, N 2, R 13% = 1.47 Price at T2 = Next Div 1.99 / 13% - 6% = 28.43 PV of 28.43, N 2, R 13% = 22.26 Stock Price today = 1.33 + 1.47 + 22.26 = 25.06