Assume that it is now January 1, 2016. Juan Jones Engineering (JJE) has develope
ID: 2758516 • Letter: A
Question
Assume that it is now January 1, 2016. Juan Jones Engineering (JJE) has developed a solar powered vehicle that has a driving range of 200% more than any other solar powered vehicle on the market. As a result, JJE, is expected to experience a 17% annual growth rate for the next 5 years. Other manufacturers are projected to develop comparable technology at the end of 5 years, and JJE’s growth rate will slow to 4% per year indefinitely. Stockholders require a return of 11% on JJE’s stock. The most recent annual dividend, which was paid today, was $1.65 per share. What is the value of the stock today? You need to value the dividends AND the price to solve. You must show your work to receive full credit. Round calculations to the second decimal place
Explanation / Answer
Year Nature Cashflow PV Factor @ 11% Discounted Cashflow A B A*B 1 Dividend 1.93 0.9009 1.74 2 Dividend 2.26 0.8116 1.83 3 Dividend 2.64 0.7312 1.93 4 Dividend 3.09 0.6587 2.04 5 Dividend 3.62 0.5935 2.15 5 Market Price at the end of Year 5 53.75 0.5935 31.90 Current Stock Price as per Dividend Growth Model 41.58 Re = 11% Constant growth rate = g = 4% after 5 years Dividend Calculations Year Calculation Amount 1 D1 = 1.65 * 1.17 1.93 2 D2 = 1.65 * 1.17^2 2.26 3 D3 = 1.65 * 1.17^3 2.64 4 D4 = 1.65 * 1.17^4 3.09 5 D5 = 1.65 * 1.17^5 3.62 D6 = 1.65 * 1.17^5*1.04 3.76 Market Price at the end of Year 5 = D6 / (Re - g) Market Price at the end of Year 5 = 3.76 / (0.11 - 0.04) = $ 53.75