Question

Warf Co. just paid a dividend of $4.00 per share. The company will increase its dividend

by 20 percent next year and will then reduce the dividend growth rate by 5 percentage

points per year until it reaches the industry average of 5 percent, after which the

company will keep that 5 percent constant growth rate, forever. If the required return on

Warf stock is 13 percent, what will a share of stock sell for today?

In a DCF analysis, we often estimate the terminal value of a firm or project using a

growing perpetuity. Is it possible that firms with good management could have higher

growth rate than the market or industry average growth rate forever? Why or why not

Answer 1