6. Investors expect Swift Company's dividends to grow 20 percent per year for the next 2...

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6. Investors expect Swift Companys dividends to grow 20 percent per year for the next 2 years, 15 percent during the third y

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Answer 1

Answer #1

Year 1 dividend = 2 (1 + 20%) = 2.4

Year 2 dividend = 2.4 (1 + 20%) = 2.88

Year 3 dividend = 2.88 (1 + 15%) = 3.312

Year 4 dividend = 3.312 (1 + 7%) = 3.54384

Value at year 3 = D4 / required rate - growth rate

Value at year 3 = 3.54384 / 0.1 - 0.07

Value at year 3 = 3.54384 / 0.03

Value at year 3 = 118.128

Current market price = 2.4 / (1 + 0.1)¹ + 2.88 / (1 + 0.1)² + 3.312 / (1 + 0.1)³ + 118.128 / (1 + 0.1)³

Current market price = 2.1818 + 2.380165 + 2.488355 + 88.751315

Current market price = $95.80

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