Assume that the average firm in your company\'s industry is expected to grow at
ID: 2774954 • Letter: A
Question
Assume that the average firm in your company's industry is expected to grow at a constant rate of 5%, and its divident yield is 4%. Your compancy is about as risky as the average firm in the industry, but it has just developed a line of innovative new products, which leads you to expect that its earnings and dividends will grow at a rate of 40% (D1=D0 (1.40)) this year and 25% the following year after which growth should match the 5% industry average rate. That last dividend paid (D0) was $2. What is the stock's value per share.
Please be as detailed as possible, really need every step. Thanks
Explanation / Answer
Required Rate of return (Re)= Constant Growth rate + divident yield
Required Rate of return (Re)= 5% + 4%
Required Rate of return (Re)= 9%
Constant Growth rate (g) = 5%
D1 = D0*(1+40%)
D1 = 2*1.4
D1 = 2.80
D2 = D1*(1+25%)
D2 = 2.80*1.25
D2 = 3.5
D3 = D2*(1+5%)
D3 = 3.5*1.05
D3 = 3.675
Stock's value per share = D1/(1+ Re) + D2/(1+Re)^2 + (D3/(Re-g))/(1+Re)^2
Stock's value per share = 2.80/(1+9%) + 3.50/(1+9%)^2 + (3.675/(9%-5%))/(1+9%)^2
Stock's value per share = $ 82.84
Answer
Stock's value per share = $ 82.84