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Massey Motors is a new firm in a rapidly growing industry. The company is planning on...

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Finance

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 Solved by verified expert
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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