Question

help solve please! how to solve with a calculator would be helpful

2. As an analyst at Churnem & Bernem Securities, you are responsible for making recommendations to your firm's clients regarding common stocks. After gathering data on Denver Semiconductors, you have found that its dividend has been growing at a rate of 8% per year to the current (D) $1.25 per share. You believe that an appropriate rate of return for this stock is 15% per year. b. If you expect that the dividend will grow at a 8% rate forever, what is the highest price at which you would recommend purchasing this stock to your clients? c. Suppose now that you believe that the company's new product line will cause much higher growth in the near future. Your new estimate is for a 20% annual growth for the first 3-year period, followed by a 8% growth rate. Using these new assumptions, what is the value of the stock?

Answer 1

b

Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate)

Price = 1.25 * (1+0.08) / (0.15 - 0.08)

Price = 19.29

c

	Required rate=	15.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	1.25	20.00%	1.5		1.5	1.15	1.3043
2	1.5	20.00%	1.8		1.8	1.3225	1.36106
3	1.8	20.00%	2.16	33.326	35.486	1.520875	23.33262
	Long term growth rate (given)=	8.00%			Value of Stock =	Sum of discounted value =	26
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor