Question

Verona Industries just paid a dividend of $1.80. You expect the dividend to grow at 12% for the next two years, and then the dividend will grow at 5% for the foreseeable future. You estimate the appropriate discount rate is 10.75%. Using this information you estimate the current price for Verona is closest to: A. $37.88. B. $50.06. C. $41.53.

Answer #1

Given
data |
||||

Dividend Paid (Do) | $1.80 | |||

Dividend growth year 1 & 2 | 12% | |||

After year 2 Dividend growth rate (g) | 5% | |||

Discount rate ( r ) | 10.75% | |||

Year |
Particular |
Dividend
Value |
Present Value
formula |
Present
Value |

1 | Dividend (D1) = D0*(1+g) =1.80*(1+12%) | $2.02 | =2.02/(1+10.75%)^1 | $1.82 |

2 | Dividend (D2) = D1*(1+g) =2.02*(1+12%) | $2.26 | =2.26/(1+10.75%)^2 | $1.84 |

2 | Terminal Value (Horizon Value)=D2*(1+g)/r-g =2.26*(1+5%)/(10.75%-5%) | $41.23 | =41.23/(1+10.75%)^2 | $33.62 |

Stock Price (total of present
value) = |
$37.28 |

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