Question

Dividend discount model A stock will not pay dividends until three years from now. The dividend...

Dividend discount model A stock will not pay dividends until three years from now. The dividend then will be $2.00 per share, the dividend payout ratio will be 40 percent, and return on equity will be 15 percent. If the required rate of return is 12 percent, which of the following is closest to the value of the stock?

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Answer #1
Growth rate=ROE*(1-payout ratio)
growth rate=15*(1-0.4)
growth rate = 9
WACC= 12.00%
Year Previous year FCF FCF growth rate FCF current year Horizon value Total Value Discount factor Discounted value
1 0 0.00% 0 0 1.12 0
2 0 0.00% 0 0 1.2544 0
3 0 0.00% 2 72.667 74.667 1.404928 53.1465
Long term growth rate (given)= 9.00% Value of Enterprise = Sum of discounted value = 53.15
Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 3 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor
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