Question

Assume Highline Company has just paid an annual dividend of $1.07. Analysts are predicting an 11.3% per year growth rate in earnings over the next five years. After then, Highline's earnings are expected to grow at the current industry average of 5.4% per year. If Highline's equity cost of capital is 8.9% per year and its dividend payout ratio remains constant, for what price does the dividend-discount model predict Highline stock should sell? The value of Highline's stock is $ . (Round to the nearest cent.)

Answer 1

As per Dividend discount model, value of share is equal to the present value of all future dividends

= 1.07(1.113)/(1.089) + 1.07(1.113)^2/(1.089)^2 + 1.07(1.113)^3/(1.089)^3 + 1.07(1.113)^4/(1.089)^4 + 1.07(1.113)^5/(1.089)^5 + 1.07(1.113)^5(1.054)/(1.089)^5 *(8.9%-5.4%)

= $41.6472

i.e. $41.65