Combined Communications is a new firm in a rapidly growing industry. The company
ID: 2780101 • Letter: C
Question
Combined Communications is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 23 percent a year for the next 4 years and then decreasing the growth rate to 5 percent per year. The company just paid its annual dividend in the amount of $1.40 per share. What is the current value of one share of this stock if the required rate of return is 8.50 percent?
MC Qu. 9-A5 Combined Communications is a new firm in a rapidly growing... Combined Communications is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 23 percent a year for the next 4 years and then decreasing the growth rate to 5 percent per year. The company just paid its annual dividend in the amount of $1.40 per share. What is the current value of one share of this stock if the required rate of return is 8.50 percent? O $62.77 O $7710 O $73.01 $58.21 O $66.50Explanation / Answer
Combined Communication Annual Diviend= $ 1.40 Per Share Required rate of return= 8.50% Dividend growth rate=23% for next four years and than decreasing 5% per year Dividend for first four years= 1st Year=($1.40*(1.23))= $ 1.722 2nd Year=($1.722*(1.23))= $ 2.118 3rd Year=($2.118*(1.23))= $ 2.605 4th year=($2.605*(1.23))= $ 3.204 Present Value of dividend=($3.204*(1+.05))/(.0850-.05) 96.12 Current Value of stock= 1st Year=($1.722/(1.0850)^1) $ 1.59 2nd Year=($2.118/(1.0850)^2) $ 1.80 3rd Year=($2.605/(1.0850)^3)= $ 2.04 4th year=($3.204/(1.0850)^4)= $ 2.31 5th Year=($96.12/(1.0850)^4)= $ 69.36 Current Value of stock= $ 77.10 Ans (2) $77.10