Question

CO x has been growing at a alarming rate of 20% per year. You believe the growth will last 3 more years and that the rate will drop to 5% per year. If the rate remains at 5% indefinitely, what is the total value of the stock? The total dividends just paid are $4,000,000 and the required rate is 12%

Answer 1

value of stock = dividend in present year * (1 + growth rate)/(1 + required rate) + dividend in present year * (1 + growth rate)^2/(1 + required rate) ^2 + dividend in present year * (1 + growth rate)^3/(1 + required rate) ^3 + dividend in present year * (1 + growth rate)^ * (1 + indefinite growth rate)/(1 + required rate)^3 * (required rate - indefinite growth rate)

= 4000000 * 1.2/1.12 + 4000000 * 1.2^2/1.12^2 + 4000000 * 1.2^3/1.12^3 + 4000000 * 1.2^3 * 1.05/1.12^3 * .07

= 4285714.29 + 4591836.74 + 4919825.07 + 73797376.09

= $87,594,752.19