S&P 500 Valuation (CH 12)

Apr 15th, 2015
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Academy for Five Element Acupuncture
Course: finance
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Assume that the average firm in your company's industry is expected to grow at a constant rate of 4% and that its dividend yield is 5%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D work that leads you to expect that its earnings and dividends will grow at a rate of 50% [D1 = D0(1 + g) = D0(1.50)] this year and 30% the following year, after which growth should return to the 4% industry average. If the last dividend paid (D0) was $2.25, what is the value per share of your firm's stock?

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Assumethattheaveragefirminyourcompany'sindustryisexpectedtogrowataconstantrateof4%andthatitsdividendyieldis5%.Yourcompanyisaboutasriskyastheaveragefirmintheindustry,butithasjustsuccessfullycompletedsomeR&Dworkthatleadsyoutoexpectthatitsearnings

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