The Miller Milk Company has just come up with a new lactose-free dessert product
ID: 2761559 • 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 28% for about two years. After that competitors will copy the idea and produce similar products, and growth will return to about 5%, which is normal for the dairy industry in the area. Miller recently paid an annual dividend of $2.40, which will grow with the company. The return on stocks similar to Miller's is typically around 12%. 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
Answer:
D0=$2.40
D1=2.40*(1.28)=3.072
D2=3.072*1.28=3.93216
D3=3.93216*1.05=4.128768
P2=D3/(Ke-g)
=4.128768/(0.12-0.05)
=58.9824
Calculation of NPV:
Discount rate 12% years Cash Flow ($) 1 3.072 2 62.91456 NPV $52.90