The Miller Milk Company has just come up with a new lactose-free dessert product
ID: 2761058 • Letter: T
Question
The Miller Milk Company has just come up with a new lactose-free dessert product for people who can't eat or drink ordinary dairy products. Management expects the new product to fuel sales growth at 31% for about two years. After that competitors will copy the idea and produce similar products, and growth will return to about 2%, which is normal for the dairy industry in the area. Miller recendy paid an annual dividend of S2.50, which will grow with the company. The return on stocks similar to Miller's is typically around 10%. What is the most you would pay for a share of Miller? Round PVF values in intermediate calcualtions to four decimal places. Round the answer to two decimal places.$Explanation / Answer
Price of the stock today is present value of all the future benefits Year Div Share Price Cash Flow P.V Factor@ 10% Discounted Cash Flow 0 2.5 1 1 3.275 3.2750 0.9091 2.9773 2 4.29025 54.7007 58.9909 0.8264 48.7528 NPV 51.7301 MP at the end of 2nd years = D6/Ke-g =4.29025(1.02)/(0.10-0.02) 54.7007 Price of the stock today is 51.7301