Question

Common stock value—Variable growth Lawrence Industries' most recent annual dividend was $1.25 per share (D = $1.25), and the firm's required return is 16%. Find the market value of Lawrence's shares when dividends are expected to grow at 25% annually for 3 years, followed by a 5% constant annual growth rate in years 4 to infinity The market value of Lawrence's shares is $ . (Round to the nearest cent.)

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A В C D Е 1 Last dividend (DO) $1.25 2 Firm's required rate 16% 4 Growth rate Dividend Year $1.56 6 25% 1 $1.95 7 25% 2 $2.44 25% 3 $2.56 9 4 and on 5% 10 Terminal value PV of Terminal value $23.30 11 $14.93 12 13 Current Market value of Lawrence's share $19.29 14. 15 LLI st LC LC

Cell reference -

A B 1 Last dividend (DO) Firm's required rate 1.25 2 0.16 Growth rate 5 Dividend Year -$C$2*(1+C6) -D6* (1+C7) -D7*(1+C8) -D8* (1+C9) 6 1 0.25 2 7 0.25 0.25 0.05 8 3 4 and on 10 -D9/(C3-C9) C11/(1+C3 )A3 Terminal value PV of Terminal value 11 12 13 Current Market value of Lawrence's share =NPV(C3,D6:D8)+C12 14 15

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.