Question

The last dividend paid by KU dairy was $1.00. The dairy growth rate is expected to be a constant 5% for 2 years, after which dividends are expected to grow at a rate of 10%. The company required rate of return on equity is 12%. Calculate the current price of the common stockThe last dividend paid by KU dairy was $1.00. The dairy growth rate is expected to be a constant 5% for 2 years, after which dividends are expected to grow at a rate of 10%. The company required rate of return on equity is 12%. Calculate the current price of the common stock

Answer #1

Required rate= | 12.00% | ||||||

Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |

1 | 1 | 5.00% | 1.05 | 1.05 | 1.12 | 0.9375 | |

2 | 1.05 | 5.00% | 1.1025 | 60.638 | 61.7405 | 1.2544 | 49.21915 |

Long term growth rate (given)= | 10.00% | Value of Stock = |
Sum of discounted value = |
50.16 |
|||

Where | |||||||

Current dividend =Previous year dividend*(1+growth rate)^corresponding year | |||||||

Total value = Dividend + horizon value (only for last year) | |||||||

Horizon value = Dividend Current year 2 *(1+long term growth rate)/( Required rate-long term growth rate) | |||||||

Discount factor=(1+ Required rate)^corresponding period | |||||||

Discounted value=total value/discount factor |

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Please show all steps. Thank you!

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Use the following
information to answer the next question.
· The last dividend paid by
Klein Company was $1.00.
· Klein's growth rate is
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· Klein's required rate of
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Select one:
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