Question

4.) Suppose you believe that Entergy Corp.’s 6.0 percent dividend growth rate will only hold 5 years. After that, the dividend growth rate will return to Entergy Corp.’s historical 10-year average of 7.5 percent. Note that D6 = D5 x 1.075. (Use to answer questions 4-8) a.) What was the value of Entergy Corp.’s stock on January 1, 2003 (the end of 2002), if the required rate of return is 13.5 percent? Remember this value you calculate does not have to agree with the market value of $22.26.

The current quarterly dividend is 1.08

Answer 1

current Yearly dividend	10.8*4	4.32
Year	expected dividend = current dividend*(1+growth rate)^n
1	4.5792
2	4.853952
3	5.145189
4	5.4539
5	5.781134
6	6.21472
Terminal value of stock - at the end of year 5	expected dividend in year 6/(required rate of return-growth rate)	1.55368/(13.5%-7.5%)	103.5787
Year	cash flow	present value of cash flow = cash flow/(1+r)6n r = 13.5%
1	4.5792	4.034537
2	4.853952	3.767938
3	5.145189	3.518955
4	5.4539	3.286425
5	5.781134	3.069261
	103.5787	54.99092
value of stock		72.66804