Question

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!

Answer #1

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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