Question

AVZ is a​ start-up company who is using all its cash to growth so it does...

AVZ is a​ start-up company who is using all its cash to growth so it does not plan to pay dividends for the next

5 years.

The company then plans to start paying annual cash dividends starting in year 6 of ​$6.00 for 12

years. ​ Thereafter, the company will assume a constant growth dividend policy and the estimated growth rate in dividends forever after that point is

4​%.

The price of the stock is set to yield a return of

11%.

What is the price of this stock​ today?

Homework Answers

Answer #1

P0 = D6 / (1 + r)6 + D7 / (1 + r)7 + D8 / (1 + r)8 + D9 / (1 + r)9 + D10 / (1 + r)10 + D11 / (1 + r)11 +

D12 / (1 + r)12 + D13 / (1 + r)13 + D14 / (1 + r)14 + D15 / (1 + r)15 + D16 / (1 + r)16 +

D17 / (1 + r)17 + D17(1 + g) / [(r - g)(1 + r)17]

= [$6/1.116] + [$6/1.117] + [$6/1.118] + [$6/1.119] + [$6/1.1110] + [$6/1.1111] + [$6/1.1112] +

[$6/1.1113] + [$6/1.1114] + [$6/1.1115] + [$6/1.1116] + [$6/1.1117] +

[($6 x 1.04) / {(0.11 - 0.04) x 1.1117}]

= $3.21 + $2.89 + $2.60 + $2.35 + $2.11 + $1.90 + $1.72 + $1.55 + $1.39 + $1.25 + $1.13

+ $1.02 + $15.12 = $38.24

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