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3. Nonconstant growth stock As companies evolve, certain factors can drive sudden growth. This may lead to a period of noncon

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Answer #1

1)

Dividend 1 year from now = 2.88 (1 + 20%)

Dividend 1 year from now = $3.46

2)

Required rate = Risk free rate + beta (market risk premium)

Required rate = 5% + 1.8 (6%)

Required rate = 5% + 10.8%

Required rate = 15.8%

Year 2 dividend = 3.46 (1 + 4%) = 3.5984

Horizon value = D2 / required rate - growth rate

Horizon value = 3.5984 / 0.158 - 0.04

Horizon value = 3.5984 / 0.118

Horizon value = 30.49

3)

Intrinsic value = 3.46 / (1 + 0.158)1 + 30.49 / (1 + 0.158)1

Intrinsic value = $29.32

4)

dividend yield = (D1 /price) * 100

dividend yield = (3.46 / 29.32) * 100

dividend yield = 11.79%

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