Question

Growing, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid a dividend...

Growing, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid a dividend of $3.80. You believe that dividends will grow at a rate of 21.0% per year for three years, and then at a rate of 9.0% per year thereafter. You expect that the stock will sell for $60.64 in three years. You expect an annual rate of return of 24.0% on this investment. If you plan to hold the stock indefinitely, what is the most you would pay for the stock now? options: $39.53 $31.55 $42.66 $26.64 $36.51

Homework Answers

Answer #1
Required rate= 24.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 3.8 21.00% 4.598 4.598 1.24 3.7081
2 4.598 21.00% 5.56358 5.56358 1.5376 3.61835
3 5.56358 21.00% 6.7319318 48.919 55.6509318 1.906624 29.1882
Long term growth rate (given)= 9.00% Value of Stock = Sum of discounted value = 36.51
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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