Question

# Murray Telecom paid a \$5.00 per share stock dividend last year (D0). These dividends are expected...

Murray Telecom paid a \$5.00 per share stock dividend last year (D0). These dividends are expected to grow at a rate of 8 percent per year for the next 4 years, 5 percent per year for the subsequent 2 years, and then level off into perpetuity at a growth rate of 2 percent per year. What should be the value of the firm’s stock if the required rate of return on similar securities is 12 percent? Please show calculations!

 Year Dividend PVF 12% dividend *PVF 1 5(1+.08)=5.4 .89286 4.8214 2 5.4(1+.08)= 5.832 .79719 4.6492 3 5.832(1+.08)= 6.2986 .71178 4.4832 4 6.2986(1+.08)= 6.8024 .63552 4.3231 5 6.8024(1+.05)= 7.1426 .56743 4.0529 6 7.1426(1+.05)= 7.4997 .50663 3.7996 6 terminal value 76.4969 .50663 38.7556 value of the firm’s stock 64.89

Terminal value at year6 =D6(1+g)/(Rs-g)

= 7.4997(1+.02)/(.12-.02)

= 7.4997*1.02/.10

= 76.4969

**FIND PRESENT VALUE FACTOR FROM TABLE AT 12% OR USING THE FORMULA ==1/(1+I)^N Where n =1,2,3,4,5,6

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