Question

# A7X Corp. just paid a dividend of \$1.55 per share. The dividends are expected to grow...

 A7X Corp. just paid a dividend of \$1.55 per share. The dividends are expected to grow at 30 percent for the next 7 years and then level off to a growth rate of 8 percent indefinitely.

 If the required return is 14 percent, what is the price of the stock today?

A7X Corp.

Price of the stock today:

 Year Cash flows (CF)(\$) present value factor (PVF) @ 14% Discounted cash flows (\$) (CF × PVF) 1 Dividend 1.55(1.3)1 = 2.015 0.877 1.767 2 Dividend 1.55(1.3)2 = 2.620 0.769 2.015 3 Dividend 1.55(1.3)3 ​​​​​= 3.405 0.675 2.298 4 Dividend 1.55(1.3)4 = 4.427 0.592 2.621 5 Dividend 1.55(1.3)5 = 5.755 0.519 2.987 6 Dividend 1.55(1.3)6 = 7.482 0.456 3.412 7 Dividend 1.55(1.3)7 = 9.726 0.400 3.890 7 Terminal value* 9.726(1.08)/(0.14-0.8) = 175.068 0.400 70.027 89.017

Present value of stock is \$ 89.017 (approximately)

Terminal value = {Dividend of year 7 × (1+Growth rate)} / (Required return - Growth rate)

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