Question

A company just paid an annual dividend of $5.00 per share on its common stock. Due to the success of a new product, the firm expects to achieve a dramatic increase in its short-term growth rate in sales to 30 percent annually for the next three years. After this time, the growth rate in sales is expected to return to the long-term constant rate of 6 percent per year. Assume that the company’s dividend growth rate matches the rate of growth in sales. If the required return on the stock is 15 percent per year, what is the current stock price? Assume that dividends are paid annually.

Answer #1

**The value of the stock is computed as shown
below:**

**= Dividend in year 1 / (1 + required rate of
return)**^{1}**+**
**Dividend in year 2 / (1 + required rate of
return)**^{2}**+ Dividend in
year 3 / (1 + required rate of
return)**^{3}**+ 1 / (1 +
required rate of return)**^{3}**[ ( Dividend in year 3 (1 + growth rate) / ( required rate
of return - growth rate) ]**

= ($ 5 x 1.30) / 1.15 + ($ 5 x 1.30^{2}) /
1.15^{2} + ($ 5 x 1.30^{3}) / 1.15^{3} + 1
/ 1.15^{3} x [ (($ 5 x 1.30^{3} x 1.06) / (0.15 -
0.06) ]

= $ 6.5 / 1.15 + $ 8.45 / 1.15^{2} + $ 10.985 /
1.15^{3} + 1 / 1.15^{3} x [ $ 129.3788889 ]

= $ 6.5 / 1.15 + $ 8.45 / 1.15^{2} + $ 140.3638889 /
1.15^{3}

**= $ 104.33 Approximately**

Feel free to ask in case of any query relating to this question

Storico Co. just paid a dividend of $3.15 per share. The company
will increase its dividend by 20 percent next year and then reduce
its dividend growth rate by 5 percentage points per year until it
reaches the industry average of 5 percent dividend growth, after
which the company will keep a constant growth rate forever. If the
required return on the company’s stock is 12 percent, what will a
share of stock sell for today?

Storico Co. just paid a dividend of $3.15 per share. The company
will increase its dividend by 20 percent next year and then reduce
its dividend growth rate by 5 percentage points per year until it
reaches the industry average of 5 percent dividend growth, after
which the company will keep a constant growth rate forever. If the
required return on the company’s stock is 12 percent, what will a
share of stock sell for today?
(Please show how to...

The Jackson Company has just paid a dividend of $3.00 per share
on its common stock, and it expects this dividend to grow by 10
percent per year, indefinitely. The firm has a beta of 1.50; the
risk-free rate is 10 percent; and the expected return on the market
is 14 percent. The firm's investment bankers believe that new
issues of common stock would have a flotation cost equal to 5
percent of the current market price. How much should...

Co. just paid a dividend of $1.30 on each share of its stock.
The company expects that the dividends will increase at a constant
rate of 4 percent per year in perpetuity. Investors require a 14
percent return on this company's stock. Calculate the current stock
price. Calculate the stock price in three years. Calculate the
stock price in 12 years.

Stock problem.
A stock just reported earnings of $5.00 per share and just paid
a dividend of $2.6 per share. Investors require a 11% return to
invest in this company, and the company makes a return of 8% on
investments. Find the PVGO. Keep 4 decimals in your growth rate
calculations (for example, 10.12%), and then round your answer to 2
decimal places.

Storico Co. just paid a dividend of $2.45 per share. The company
will increase its dividend by 20 percent next year and will then
reduce its dividend growth rate by 5 percentage points per year
until it reaches the industry average of 5 percent dividend growth,
after which the company will keep a constant growth rate forever.
If the required return on Storico stock is 11 percent, what will a
share of stock sell for today?

Madison Tour, Inc., just paid a dividend of $3.15 per share on
its stock. The dividends are expected to grow at a constant rate of
6 percent per year, indefinitely. Assume investors require a return
of 11 percent on this stock.
What will the price be in 3 years?

Your company just paid a dividend of $4.0 per share. The company
will increase its dividend by 5% next year and will then increase
its dividend growth rate by 2% points per year ( from 5% to 7% to
9% to 11%) until it reaches the industry average of 11% dividend
growth, after which the company will keep a constant growth rate
forever. The required return on your company’s stock is 13%. What
will a share of stock sell for...

APCE common stock just paid a dividend of $1.00 per share, but
its dividend is expected to grow at 10 percent per year for four
years and then grow at 6 percent per year forever. How much should
you be willing to pay for the APCE stock? Assume 12% required
return.
20.24
27.29
16.62
25.83

The In-Tech Co. just paid a dividend of $1 per share. Analysts
expect its dividend to grow at 25% per year for the next three
years and then at a constant growth rate per year thereafter. The
estimate of the constant growth rate of dividends is based on the
long term return of equity 25% and payout ratio 80%. If the
required rate of return on the stock is 18%, what is the current
value of the stock? Clearly show...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 12 minutes ago

asked 12 minutes ago

asked 23 minutes ago

asked 27 minutes ago

asked 35 minutes ago

asked 35 minutes ago

asked 35 minutes ago

asked 35 minutes ago

asked 37 minutes ago

asked 43 minutes ago

asked 48 minutes ago

asked 1 hour ago