Question

Finco is a new firm that just paid an annual dividend of $1 a share. The firm plans to increase its dividend by 20% per year for the next four years and then decrease the growth rate to 5% annually. If the required rate of return is 10%, what is one share of this stock worth today?

$35.77

$34.77

$32.07

$48.59

$43.60

Answer 1

of value during abnormal Calculation stage pv@ 1000 - Dividends 1X120°. = 102 1-2x 120%. = 1-44 1-44x 120%. = 1.728 1.728 x 120%. = 2.0736 1:09 1619 1.30 1.42 sw .. Value during Py = Ds constant stage : 2.0736x 105l. 0.10 - 0.05 Re-g DE = $ $43.5456 Pu today = $43.5456 Value of share $ 29.741 today = $(29.74 +5) un $ 34.747 $34.77 (Option B) - Scanned with CamScanner

Explaination. The value of stock taday is equal to present value of al future Cashflows expected from the stock discounted at the required nake of Netun. you the abnormal stage, the dividend was expected to grow @ 20%. per year so we need to prepare the table to Calculate the present value for p в цях. — - In the constant stage as the dina dend hate was fixed a solo perpetuity so we have applied the Gordan formu. la. But the value so derived is at to t=4 so we have pulled back to get the worth today: After both calculations, the value derived in both the stages is added to get the final value of stock a A I D foday canned with CamScanner