Question

Assume Highline Company has just paid an annual dividend of $ 0.93. Analysts are predicting an 11.1 % per year growth rate in earnings over the next five years. After​ then, Highline's earnings are expected to grow at the current industry average of 5.4 % per year. If​ Highline's equity cost of capital is 8.9 % per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell? The value of​ Highline's stock is ​$ nothing. ​(Round to the nearest​ cent.)

Answer 1

D1=(0.93*1.111)=1.03323

D2=(1.03323*1.111)=1.14791853

D3=(1.14791853*1.111)=1.27533749

D4=(1.27533749*1.111)=1.41689995

D5=(1.41689995*1.111)=1.57417584

Value after year 5=(D5*Growth rate)/(Equity cost of capital-Growth rate)

=(1.57417584*1.054)/(0.089-0.054)

=47.405181

Hence current value=Future dividend and value*Present value of discounting factor(rate%,time period)

=1.03323/1.089+1.14791853/1.089^2+1.27533749/1.089^3+1.41689995/1.089^4+1.57417584/1.089^5+47.405181/1.089^5

=$35.89(Approx).