Question

# Joe’s firm is fast growing. Therefore, it will pay no dividend for the next 5 years....

Joe’s firm is fast growing. Therefore, it will pay no dividend for the next 5 years. After that, Joe's firm will initiate dividend payment. The first dividend will be \$2 (at the end of the 6th year) and the dividend will grow at a rate of 5% for 10 years. Then the industry starts to stabilize, and Joe’s firm will pay \$3 forever. If the required rate of return is 10%, calculate the stock price.

#### Homework Answers

Answer #1
 t Cash Flow Discounting Factor [1/(1.1^t)] PV of Cash Flow (cash flow*discounting factor) 1 0 + = 0 0.909090909 0 2 0 + = 0 0.826446281 0 3 0 + = 0 0.751314801 0 4 0 + = 0 0.683013455 0 5 0 + = 0 0.620921323 0 6 0 + = 2 0.56447393 1.12894786 7 2 + 5% = 2.1 0.513158118 1.077632048 8 2.1 + 5% = 2.205 0.46650738 1.028648773 9 2.205 + 5% = 2.31525 0.424097618 0.981892011 10 2.3153 + 5% = 2.431013 0.385543289 0.937260556 11 2.431 + 5% = 2.552563 0.350493899 0.894657803 12 2.5526 + 5% = 2.680191 0.318630818 0.85399154 13 2.6802 + 5% = 2.814201 0.28966438 0.815173742 14 2.8142 + 5% = 2.954911 0.263331254 0.77812039 15 2.9549 + 5% = 3.102656 0.239392049 0.742751282 16 3.1027 + 5% = 3.257789 0.217629136 0.70898986 16 Terminal Value = [3/10%] 30 0.217629136 6.528874074 Expected Share Price today =sum of PVs 16.47693994 = \$16.48
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