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An analyst has made the following estimate of Company Z’s dividends. After 5 years of growing...

An analyst has made the following estimate of Company Z’s dividends. After 5 years of growing annually at 2% from an initially value of $1.00, company Z is expected to quit growing and pay a constant dividend of $1.5 indefinitely. (10 pts) If the required return is 12%, what should the stock of Company Z sell for today?

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Answer #1

Terminal value at year 5 = Constant dividend /rs

                                         = 1.5 / .12

                                          = 12.50

year Dividend PVF 12% Dividend *PVF
1 1 .89286 .89286
2 1 (1+.02)= 1.02 .79719 .81313     [1.02*.79179]
3 1.02(1+.02)= 1.0404 .71178 .74054
4 1.0404(1+.02)= 1.0612 .63552

.67441
5 1.0612(1+.02)= 1.0824 .56743 .61419
5 12.50 .56743 7.09288
value of stock today 10.83
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