Problem 7-13 Nonconstant Growth Stock Valuation Simpkins Corporation does not pa
ID: 2710694 • Letter: P
Question
Problem 7-13
Nonconstant Growth Stock Valuation
Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $1.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 60% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 7% per year. If the required return on the stock is 12%, what is the value of the stock today (assume the market is in equilibrium with the required return equal to the expected return)? Round your answer to the nearest cent. Do not round your intermediate computations.
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Explanation / Answer
required return = 12% Year Previous year dividend Dividend growth rate Dividend current year Terminal value Total Value Discount factor Discounted value 1 0 0% 0 0 1.12 0 2 0 0% 0 0 1.2544 0 3 0 0% 1 1 1.404928 0.711780248 4 1 60% 1.6 1.6 1.57351936 1.016828925 5 1.6 60% 2.56 54.784 57.344 1.762341683 32.53852561 6 2.56 7.00% 2.7392 Value of stock = Sum of discounted value= 34.26713479 Discount factor= (1+ required rate)^N Discounted value= total value/discount factor Total value = dividend + terminal value Terminal value = year 6 dividend /( required rate - growth rate)