Question

A7X Corp. just paid a dividend of $1.50 per share. The dividends are expected to grow at 40 percent for the next 10 years and then level off to a growth rate of 6 percent indefinitely. |

If the required return is 15 percent, what is the price of the stock today? |

Answer #1

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

value of stock = Present value of dividends + Horizontal value

Horizontal value = dividend next year/(Required return - growth rate)

= 1.5 * 1.4^10*1.06/(0.15-0.06)

= 511.016557124

Value of stock = 1.5*1.4/1.15 +1.5*1.4^2/1.15^2 + 1.5*1.4^3/1.15^3 + 1.5*1.4^4/1.15^4 + 1.5*1.4^5/1.15^5 + 1.5*1.4^6/1.15^6 + 1.5*1.4^7/1.15^7 + 1.5*1.4^8/1.15^8 + 1.5*1.4^9/1.15^9 + 1.5*1.4^10/1.15^10 + 511.016557124/1.15^10

= 177.98

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Multiple Choice
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****show step****

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