Question

Assume Highline Company has just paid an annual dividend of $ 1.07. Analysts are predicting an 11.5 % per year growth rate in earnings over the next five years. After? then, Highline's earnings are expected to grow at the current industry average of 5.2 % per year. If? Highline's equity cost of capital is 7.9 % per year and its dividend payout ratio remains? constant, for what price does the? dividend-discount model predict Highline stock should? sell?

the value of highline's stock is?

Answer 1

D1=1.07*1.115=1.19305

D2=1.19305*1.115=1.33025075

D3=1.33025075*1.115=1.48322959

D4=1.48322959*1.115=1.65380099

D5=1.65380099*1.115=1.8439881

Value after year 5=(D5*Growth rate)/(Equity cost of capital-Growth rate)

=(1.8439881*1.052)/(0.079-0.052)

=71.84724

Hence current value=Future dividend and value*Present value of discounting factor(rate%,time period)

=1.19305/1.079+1.33025075/1.079^2+1.48322959/1.079^3+1.65380099/1.079^4+1.8439881/1.079^5+71.84724/1.079^5

=$55.03(Approx)