Question

Instructions	Do not do any interim rounding. For numeric answers, state values to 2 decimal places (24.50 for dollar values or 2.50 for years, etc), and percentages as percentages to 2 decimal places (9.25 not .0925). Do not include labels such as $, %, or words. For multiple-choice questions, choose the best answer.

Terahertz Tech (TT) expects dividends to grow by 9.75% for the next two years, then for growth to stabilize at 3.75% for the long-term, Their most recent annual dividends were $4.05. You estimate the discount rate for TT to be 10.40%. Using this information, you determine the company's price should be:

	A.	$70.47.
	B.	$84.14.
	C.	$64.59.

Answer 1

g1 = growth rate = 9.75%

g2 = growth rate = 3.75%

r = discount rate = 10.40%

D0 = Curretn Dividend = $4.05

D1 = Dividend in Year 1 = D0 * (1+g1) = $4.05 * (1+9.75%) = $4.444875

D2 = Dividend in Year 2 = D1 * (1+g1) = $4.444875 * (1+9.75%) = $4.87825031

D3 = Dividend in Year 3 = D2 * (1+g2) = $4.87825031 * (1+3.75%) = $5.0611847

Horizon Value at the end of year 2 = D3 / (r - g2)

= $5.0611847 / (10.40% - 3.75%)

= $76.1080406

Current share price = [D1 / (1+r)^1] + [D2 / (1+r)^2] + [Horizon Value / (1+r)^2]

= [$4.444875 / (1+10.40%)^1] + [$4.87825031 / (1+10.40%)^2] + [$76.1080406 / (1+10.40%)^2]

= [$4.444875 / 1.104] + [$4.87825031 / 1.218816] + [$76.1080406 / 1.218816]

= $4.02615489 + $4.00245017 + $62.4442415

= $70.4728466

Therefore, Current share price today is $70.47

Option A is correct