Question

ABC Inc., will pay no dividends over the next 13 years because the firm needs to...

ABC Inc., will pay no dividends over the next 13 years because the firm needs to retain its earnings for growth purposes. The company will pay an $4 per share dividend in 14 years and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 9 percent, what is the current (t=0) share price?

ABC Inc. just paid a dividend of $1.75 per share. The company will increase its dividend by 28 percent next year and will then reduce its dividend growth rate by 7 percentage points per year until it reaches the industry average of 7 percent dividend growth, after which the company will keep a constant growth rate forever. If the required return on the stock is 12 percent, what will a share of stock sell for today?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Answer to Question 1:

Dividend Year 14, D14 = $4.00
Growth Rate, g = 4%
Required Return, rs = 9%

Stock Price Year 13, P13 = D14 / (rs - g)
Stock Price Year 13, P13 = $4.00 / (0.09 - 0.04)
Stock Price Year 13, P13 = $4.00 / 0.05
Stock Price Year 13, P13 = $80.00

Current Stock Price, P0 = P13 / (1 + rs)^13
Current Stock Price, P0 = $80.00 / 1.09^13
Current Stock Price, P0 = $26.09

Answer to Question 2:

Last Dividend, D0 = $1.75

Growth Rate, Year 1 = 28%
Growth Rate, Year 2 = 21%
Growth Rate, Year 3 = 14%
Growth Rate, Year 4 and onward (g) = 7%

D1 = $1.75 * 1.28 = $2.24
D2 = $2.24 * 1.21 = $2.7104
D3 = $2.7104 * 1.14 = $3.0899
D4 = $3.0899 * 1.07 = $3.3061

Required Return, rs = 12%

P3 = D4 / (rs - g)
P3 = $3.3061 / (0.12 - 0.07)
P3 = $3.3061 / 0.05
P3 = $66.122

Current Stock Price, P0 = $2.24/1.12 + $2.7104/1.12^2 + $3.0899/1.12^3 + $66.122/1.12^3
Current Stock Price, P0 = $53.42

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
ABC Inc., will pay no dividends over the next 13 years because the firm needs to...
ABC Inc., will pay no dividends over the next 13 years because the firm needs to retain its earnings for growth purposes. The company will pay a $6 per share dividend in 14 years and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 9 percent, what is the current (t=0) share price?
A company plans to pay no dividends in the next 3 years because it needs earnings...
A company plans to pay no dividends in the next 3 years because it needs earnings to finance new investment projects. The firm will pay a $3.00 per share dividend in year 4 and will increase the dividend by 20% per year for the next 3 years (i.e., year 5 to year 7). After that the company will maintain a constant dividend growth rate of 6 percent per year forever. The required return on the stock is 16% per year....
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock...
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 14 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $8 per share dividend in 15 years and will increase the dividend by 7 percent per year thereafter. If the required return on this stock is 11 percent, what is the current share price?
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock...
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 12 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $11 per share dividend in 13 years and will increase the dividend by 7 percent per year thereafter.    Required: If the required return on this stock is 13 percent, what is the current share price? (Do not round your intermediate calculations.)
1. XYZ Inc. has paid annual dividends of $.48, $0.60, and $0.62 a share over the...
1. XYZ Inc. has paid annual dividends of $.48, $0.60, and $0.62 a share over the past three years, respectively. The company plans to maintain a constant dividend in the future. If the required rate of return is 14% for such stock with no growth potential, how much is the price per share you are willing to pay? Answer: _____ ( round to 2 decimal places) 2. ABC pays a constant dividend of $0.75 a share. The company announced today...
9. ABC, Inc stock currently sells for $45 per share. The market requires a 9 percent...
9. ABC, Inc stock currently sells for $45 per share. The market requires a 9 percent return on the firm's stock. If the company maintains a constant 5.5 percent growth rate in dividends, what was the most recent dividend per share paid on the stock? 10. ABC, Inc pays dividends annually. The expected dividend payment in year 5 is $12.00. The growth rate, which is currently 15%, is expected to decline linearly over six years, between year 5 and year...
ABC Inc. just announced it is increasing its annual dividend to $2.00 next year and establishing...
ABC Inc. just announced it is increasing its annual dividend to $2.00 next year and establishing a policy whereby the dividend will increase by 2 percent annually thereafter. (1) What will the dividend be 5 years from now? (2) How much will one share of this stock be worth 10 years from now if the required rate of return is 7 percent?
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock...
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 13 years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $13 per share 14 years from today and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 12 percent, what is the current share price?
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock...
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a $9.4 per share dividend 10 years from today and will increase the dividend by 4.9 percent per year thereafter. If the required return on this stock is 8.96 percent, what is the current share price?
Cullumber, Inc., management expects to pay no dividends for the next six years. It has projected...
Cullumber, Inc., management expects to pay no dividends for the next six years. It has projected a growth rate of 25 percent for the next seven years. After seven years, the firm will grow at a constant rate of 5 percent. Its first dividend, to be paid in year 7, will be $3.36. If the required rate of return is 19 percent, what is the stock worth today?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT