Question

ABC company is expected to grow at the industry constant rate of 6% and its dividend yield is 7%. the company is as risky as the average firm in the industry, but it successfully completed some R&D work that leads to the expectation that its earnings and dividends will grow at a rate of 50% this year and 25% in the following year, after which growth return to the 6% industry average. if the last dividend was $1.00, what is the estimated value per share of ABC Company's stock?

please show formula and all the work

Answer 1

Assuming dividend yield + growth as required return = 0.13 or 13%

Year Dividend Terminal value Total cash flow DF PV 0 1 1 1.5 1.5 0.8849558 $        1.33 2 1.875 28.39285714 30.26786 0.7831467 $      23.70 3 1.9875 Price $      25.03

Terminal value = 1.9875/(0.13-0.06)
DF=1/(1.13^n) where n is the number of year
Stock price is sum of PV of year 1 and year 2

Hence estimated value per share