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 4% and that its dividend yield is 6%. 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 30% the following year, after which growth should return to the 4% industry average. If the last dividend paid (D0) was $1.5, 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

Dividend yield = Dividend*100 /current price

6 = 1.5 *100 / X

X(current price) = 1.5*100/6

                       = $ 25 per share

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