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A7X Corp. just paid a dividend of $1.30 per share. The dividends are expected to grow...

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Finance

A7X Corp. just paid a dividend of $1.30 per share. Thedividends are expected to grow at 35 percent for the next 8 yearsand then level off to a growth rate of 6 percent indefinitely.

   

If the required return is 14 percent, what is the price of thestock today?

Multiple Choice

  • $92.39

  • $2.93

  • $90.58

  • $88.77

  • $66.62

Answer & Explanation Solved by verified expert
3.7 Ratings (502 Votes)

Required rate= 14.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 1.3 35.00% 1.755 1.755 1.14 1.5395
2 1.755 35.00% 2.36925 2.36925 1.2996 1.82306
3 2.36925 35.00% 3.1984875 3.1984875 1.481544 2.15889
4 3.1984875 35.00% 4.317958125 4.317958125 1.68896016 2.55658
5 4.317958125 35.00% 5.829243469 5.829243469 1.925414582 3.02753
6 5.829243469 35.00% 7.869478683 7.869478683 2.194972624 3.59
7 7.869478683 35.00% 10.62379622 10.62379622 2.502268791 4.24567
8 10.62379622 35.00% 14.3421249 190.033 204.3751249 2.852586422 71.64555
Long term growth rate (given)= 6.00% Value of Stock = Sum of discounted value = 90.58
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 8 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

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