Massey Motors is a new firm in a rapidly growing industry. The
company is planning on...
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Massey Motors is a new firm in a rapidly growing industry. Thecompany is planning on increasing its annual dividend by 10% a yearfor the next 3 years and then decreasing the growth rate to 4% peryear. The company just paid its annual dividend in the amount of1.00 per share. What is the current value of one stock if therequired rate of return is 13.75?
Please include steps/ formulas involved for this problem
Answer & Explanation
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4.3 Ratings (535 Votes)
Required rate=
13.75%
Year
Previous year dividend
Dividend growth rate
Dividend current year
Horizon value
Total Value
Discount factor
Discounted value
1
1
10.00%
1.1
1.1
1.1375
0.967
2
1.1
10.00%
1.21
1.21
1.29390625
0.93515
3
1.21
10.00%
1.331
14.197
15.528
1.471818359
10.55021
Long term growth rate (given)=
4.00%
Value of Stock =
Sum of discounted value =
12.45
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 3 *(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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