Question

Question 1 9 points Save Answe City Foods, is a firm that is experiencing rapid growth. The firm just paid a dividend of $5.00 yesterday. They expect to see their dividend grow at a twenty percent rate for the next two years and then level out at a continuous ten percent growth rate. City Food's required rate of return is twenty percent. What is the first year dividend? (sample answer: $2.50) What is the horizon, or terminal value? (sample answer: $25.45) What is the most you would pay for City Foods' common stock now? (sample answer: $24.45)

Answer 1

last - $5 year de vidend - (Dol rate growth for next two years = 20% rate growth after two years = 10% Required rate of return = 20%

1 0 first year devidend last year devidend (lt growth rate) $ 5 x C1-20) = 9 $ and year devided - Dz = D. (1+ growth rate) $6 (2.20) $ 7.2

I = 1 DZ (It ② Terminal -value constant grow the rate of 3rd year) Required return - Constant growthe/ rate of 3rd year on words $ 7.2 (1.10) 20% - 10% = $ 7.92 107. = $ 79.2.

price of City foods common stock price of Stock = devidond present value of de of terminal value plus present value = year of devidend present value 1st $ 6 1.20 present value of and year devidend = (1. 2012 = $ 5 = of terminal value $ 99.2 (1.2002 present value = $55 price 4 Stock = $ 5+ $5+ $ 55 = $ 65