Question

24. The last dividend paid by Abbot Labs was $1.00. Abbot's growth rate is expected to...

24. The last dividend paid by Abbot Labs was $1.00. Abbot's growth rate is expected to be a constant 8% for three years, after which the growth rate is expected to be 10%. Investors require a return of 16% on stocks like Abbot. What should the price of Abbot's stock be?

a.

$15.36

b.

$16.36

c.

$17.00

d.

$17.40

e.

$18.40

Please add calculations.

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Homework Answers

Answer #1
Required rate= 16.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 1 8.00% 1.08 1.08 1.16 0.931
2 1.08 8.00% 1.1664 1.1664 1.3456 0.86683
3 1.1664 8.00% 1.259712 23.095 24.354712 1.560896 15.60303
Long term growth rate (given)= 10.00% Value of Stock = Sum of discounted value = 17.4
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor
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