Question

Greshak Corp. forecasts its dividends to be $2.60 per share next year, $3.20 per share in two years, and $3.80 per share in three years. After the third year, dividends are anticipated to grow at a constant sustainable rate of 5.0% per year. If Greshak’s cost of capital is 15.0% and its applicable tax rate is 35.0%, what is the estimated share price for the company's common equity?  YOU MUST USE AT LEAST 4 DECIMAL PLACES IN ALL CALCULATIONS AND SHOW ALL WORK TO RECEIVE CREDIT.

Greshak Corp. has common stock outstanding that recently paid a dividend of $2.40. If the expected long-term growth rate for this stock is 5.0 percent, and if investors require an 13.0 percent rate of return, what is the price of Greshak's stock?  MAKE SURE YOU USE AT LEAST 4 DECIMAL PLACES WHERE APPLICABLE. YOU MUST TYPE IN ANSWER AND ALL OF YOUR WORK (INCLUDING INTERMEDIATE CALCULATIONS) TO RECEIVE CREDIT

Answer 1

1.
D1 = $2.60
D2 = $3.20
D3 = $3.80
D4 = D3 * (1 +growth rate) = $3.80 * (1 + 5%) = 3.99

P3 = D4 / (r - g)
= $3.99 / (0.15 - 0.05)
= $3.99 / 0.10
= $39.90

P0 = (D1 / (1+r)) + (D2 / (1+r)^2) + (D3 / (1+r)^3) + (P3 / (1+r)^3)

= ($2.60 / (1 + 0.15)) + ($3.20 / (1 + 0.15)^2) + ($3.80 / (1 + 0.15)^3) + ($39.90 / (1 + 0.15)^3)

= $2.2609 + 2.4197 + $2.4986 + $26.2349

= $33.4140 or $33.41

Estimated share price for the company's common equity = $33.4140 or $33.41

2.
Next year dividend = D0 * (1 + g) = $2.40 * (1 + 0.05) = $2.52

Current price of stock = Next year dividend / (Rate of return - growth rate)
= $2.52 / (0.13 - 0.05)
= $2.52 / 0.08
= $31.50

Current price of stock = $31.50