Question

Crane Corp. is expected to grow rapidly at a rate of 35 percent for the next...

Crane Corp. is expected to grow rapidly at a rate of 35 percent for the next seven years. The company's first dividend, to be paid three years from now, will be $5. After seven years, the company (and the dividends it pays) will grow at a rate of 8.1 percent. What is the value of Crane stock with a required rate of return of 14 percent?

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Answer #1

Given:

D0 = 5

Growth rate (1 to 7) = 35%

Growth rate (after 7) = 8.1%

D1 = D0 * (1+g) = 5 * (1+ 0.35) = 6.75

D2 = D1 * (1+g) = 6.75 *(1+0.35) = 9.1125

D3 = D2 * (1+g) = 9.1125 * (1+0.35) = 12.30

D4 = D3*(1+g) = 12.30*(1+0.35) = 16.605

D5 = D4*(1+g) = 16.605*(1+0.081) = 17.95 (17.950)

VALUE = D/(1+r)^3 + D1/(1+r)^4 + D2/(1+r)^5+ D3/(1+r)^6 + D4/(1+r)^7 + (D5/R-g)/(1+r)^7

= 5/(1+0.14)^3 + 6.75/(1+0.14)^4 + 9.1125/(1+0.14) ^5 + 12.30/(1+0.14)^6 + 16.605/(1+0.14)^7 + (17.95/0.14-0.081) / (1+0.14) ^7

= 5/(1.14)^3 + 6.75/(1.14)^4 + 9.1125/(1.14)^5 + 12.30(1.14)^6 + 16.605/(1.14)^7 + (17.95/0.059)/(1.14)^7

=5/1.4815 + 6.75/1.6889 + 9.1125/1.9254 + 12.30/2.195 + 16.605/2.50 + 304.237288/2.50

= 3.37 + 4 + 4.43 + 5.60 + 6.642 + 121.597637

= $145.93

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