Assume that the average firm in your company\'s industry is expected to grow at

Question

Assume that the average firm in your company's industry is expected to grow at a constant rate of 6% 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 20% the following year, after which growth should return to the 6% 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.

Explanation / Answer

D1 = 1.5*1.25 = 1.875

D2 = 1.5*1.2*1.25 = 2.25

D3 = 1.5*1.2*1.06*1.25 = 2.385 ;

P = D1 + D2/1.06 + D3/(1.06*(0.06-0.05)) = $229

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