Question

Crown Company is growing quickly. Dividends are expected to grow 15 percent per year over the next two years, 10 percent per year for the following three years, and 5 percent per year thereafter. The required rate of return (r_s) on the stock is 9 percent, and the company recently paid a dividend of $4.00. (8 points)

      a) Calculate the present value of each dividend for years 1-5.

      b) Calculate the stock price as of the end of year 5.

      c) Calculate the current stock price (P₀).

      d) Calculate the dividend yield (D₁/P₀)

2.    A firm with a WACC of 11 percent is considering the following project:

	Year	Project A
	0	($3,250)
	1	525
	2	950
	3	1,250
	4	1,525
	5	1,050

Calculate the payback period, discounted payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR) for the project. (12 points)

Answer 1

a) PV of year 1 dividend = $ 4 (1.15/1.09) = $ 4.22

PV of year 2 dividend = $ 4 (1.15*1.15/1.09^2) = $ 4.45

PV of year 3 dividend = $ 4 (1.15*1.15*1.10/1.09^3) = $ 4.49

  PV of year 4 dividend = $ 4 (1.15*1.15*1.10*1.10/1.09^4) = $ 4.53

PV of year 5 dividend = $ 4 (1.15*1.15*1.10*1.10*1.10/1.09^5) = $ 4.58

b) Stock price at the end of year 5:-

We know that dividend at the end of year 5 is $ 4.58 and thereafter, it will grow at a constant rate of 5% so we can apply the Gordon growth model here.

P(5) = D5 * (1+g)/Re - g = 4.58(1.05)/(0.09-0.05) = $ 120.225

c) Current stock price:-

We now know the stock price at the end of year 5 so to calculate the current stock price we need to discount the same to year 0 using the discount rate of 9%

P(0) = P(5) / (1+Re^5) = 120.225 /(1.09^5) = $ 78.14

d) Dividend yield (D1/P0) = (4*1.15)/78.14 = 5.89%