Question

Assume Highline Company has just paid an annual dividend of $ 1.07. Analysts are predicting an 11.2 % per year growth rate in earnings over the next five years. After​ then, Highline's earnings are expected to grow at the current industry average of 4.9 % per year. If​ Highline's equity cost of capital is 9.3 % per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell?

The value of​ Highline's stock is ​$ ​

(Round to the nearest​ cent.)

Answer 1

Year 1 dividend = 1.07 * 1.112 = 1.18984

Year 2 dividend = 1.18984 * 1.112 = 1.3231

Year 3 dividend = 1.3231 * 1.112 = 1.47129

Year 4 dividend = 1.47129 * 1.112 = 1.63607

Year 5 dividend = 1.63607 * 1.112 = 1.81931

Year 6 dividend = 1.81931 * 1.049 = 1.90846

Value at year 5 = D6 / required rate - growth rate

Value at year 5 = 1.90846 / 0.093 - 0.049

Value at year 5 = 1.90846 / 0.044

Value at year 5 = $43.3741

value of​ Highline's stock = 1.18984 / (1 + 0.093)¹ + 1.3231 / (1 + 0.093)² + 1.47129 / (1 + 0.093)³ + 1.63607 / (1 + 0.093)⁴ + 1.81931 / (1 + 0.093)⁵ + 43.3741 / (1 + 0.093)⁵

value of​ Highline's stock = $33.44