Question

AutoSave om File Home on X Cut 6 Insert - O X 0 Design Layout References Mailings Calibri (Body) - 11 - A A A A E B ru x , * A.D.A. Review View Comments Documenti - Word Ibekwe, Kemi Search ABCD AaBbccdd AaBb AaBbcc AaB AaBUCCO A36cdd ABCD 1 Normal No Spac.. Heading 1 Heading 2 Tibe Subtitle Subtle Em Emphasis Paste Help 21 - Copy Share Find Replace - Format Painter Clipboard 15. Dictate Paragraph Styles ng Voice Sun King Brewery (SKB) is planning to pay its first dividend of $2.40/share one year from now. Then, for the following five years, the dividend is projected to increase by 10% per year; thereafter, it will grow at a constant rate of 3% forever. If the required rate of return (discount rate) on SKB's stock is 15%. Questions (a) what should be the price of the stock today? (4 pts.) (b) calculate what SKB's stock price should be eight years from now, instantaneously after Div8 is paid. (1.5 pts.) 1224 3/26/20 89 words

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Required rate of return Growth rate (2-6] Constant Growth rate thereafter 15% 10% 3% Year Dividend 4 $2.40 $2.64 $2.90 $3.19 $3.51 $3.87 $3.98 PV of non-constant growing dividends $11.24 Terminal value at end of Year-6 PV of Terminal value $33.18 $14.34 18 19 20 (a) 21 22 (b) Price of stock today $25.58 Price of stock at end of Year-8 $35.20 23 24

Cell reference -

B Required rate of return Growth rate [2-6] Constant Growth rate thereafter 0.15 0.1 0.03 Year 3 Dividend 2.4 =C7*(1+$C$3) =C8*(1+$C$3) =C9*(1+$C$3) =C10*(1+$C$3) =C11*(1+$C$3) =C12*(1+C4) 5 PV of non-constant growing dividends =NPV(C2,07:012) Terminal value at end of Year-6 PV of Terminal value =C13/(C2-C4) =C17/(1+C2)^6 20 (a) Price of stock today =C15+C18 21 22 (b) Price of stock at end of Year-8 =C17*(1+C4)^2

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.