Description
Your company has a required rate of return 7%. The company has completed a new
20
project that
is expected to grow dividends at a rate of 50% the first year an
d 25% the
following year, after which growth should be at a constant rate of 6%. The last dividend paid was 1.00. What is the value per share of your Firm's stock?
Explanation & Answer
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9 | Rerured rate of return | Ke | 7% |
Constant Growth rate | g | 6% | |
Last Divided | D0 | 1 | |
Year 1 | Year 2 | ||
Dividend | 1.5 | 1.875 | |
Value of future dividends | |||
Using formula | |||
P0 = D1/Ke-g | $ 198.75 | ||
D1 = 1.875*106% | |||
Total | 1.5 | 200.625 | |
Present value factor (7%) | 0.934579 | 0.873439 | |
Present value | $ 1.40 | $ 175.23 | |
Total present value | $ 176.64 |
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