Question

8. Ortiz Power Tools Co. recently paid a $0.80 per share dividend on its stock. The company expects to t is be able to increase its dividend by 20% in each of the next two years and then by an annual growth rate of 8% for the foreseeable future, what is the current price of the stock assuming the marke in equilibrium and a required rate of return of 12.5%? a. Compute the following dividend values. Supporting Calculation Di D2 Ds b. Compute the intrinsic value of the stock at the beginning of the constant growth period (P2). P2 Supporting Calculations Required:

Answer 1

DO$0.80 D1$ 0.96 D2- $ 1.152 D3$ 1.244 supporting calculation 0.8 1.2 0.96*1.2 1.152 1.08 a. b. P2$ 27.648 (1.24416/(12.5%-8%) c. PO$23.609 (0.96/1.125) (1.152/1.125A2)(27.648/1.125A2)

for calculating D1 and D2 growth rate of 20% is used and for D3, the rate of 8% is used.

the formula for P2 is = D3 / (Ke - g)

Ke is given to be 12.5% and g to be 8%

then for P0, the figures of D1, D2, and P2 are discounted using the required rate of return (Ke) of 12.5%