Nonconstant Growth Stock Valuation Assume that the average firm in your company's industry is expected to grow...

Free

70.2K

Verified Solution

Question

Finance

Nonconstant Growth Stock Valuation
Assume that the average firm in your company's industry isexpected to grow at a constant rate of 4% and that its dividendyield is 6%. Your company is about as risky as the average firm inthe industry and just paid a dividend (D₀) of $2. Youexpect that the growth rate of dividends will be 50% during thefirst year (g_0,1 = 50%) and 30% during the second year(g_1,2 = 30%). After Year 2, dividend growth will beconstant at 4%. What is the estimated value per share of yourfirm’s stock? Do not round intermediate calculations. Round youranswer to the nearest cent.

Answer & Explanation Solved by verified expert

4.2 Ratings (485 Votes)

Step 1 )Required return on stock =Dividend Yield +Growth

= 6 +4

= 10%

Step 2)

Year	Dividend	Present value at 10%	Dividend *Present value
1	2(1+.50) = 3	.90909	2.73
2	3(1+.30)= 3.90	.82645	3.22
Terminal value /Horizon value at year 2	67.60	.82645	55.87

estimated value per share of your firm’s stock			61.82

working :

Terminal value at year 2 =D2(1+g)/(Rs-g)

= 3.90(1+.04)/(.10-.04)

= 3.90*1.04/.06

= 67.60

**Fins present value factor from table at 10% or using the formula :1/(1+i)^n

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Nonconstant Growth Stock ValuationAssume that the average firm in your company's industry isexpected to grow at a constant rate of 4% and that its dividendyield is 6%. Your company is about as risky as the average firm inthe industry and just paid a dividend (D0) of $2. Youexpect that the growth rate of dividends will be 50% during thefirst year (g0,1 = 50%) and 30% during the second year(g1,2 = 30%). After Year 2, dividend growth will beconstant at 4%. What is the estimated value per share of yourfirm’s stock? Do not round intermediate calculations. Round youranswer to the nearest cent.