Question

Assume Highline Company has just paid an annual dividend of

$0.93.

Analysts are predicting an

11.3%

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

5.7%

per year. If​ Highline's equity cost of capital is

9.4%

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

Annual Dividend paid(D0) = $0.93

Dividend growth rate for next 5 years(g) = 11.3%

Dividend growth rate therafter will growth constantly at(g1) = 5.7%

Equity cost of capital(ke) = 9.4% per year

Calculating the Current price of stock using dividend-discount model:-

P0 = $0.946 + $0.963 + $0.979 + $0.996 +$1.014 + $28.956

P0 = $33.85

So, The value of​ Highline's stock is is $33.85

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