ZZR Corp. just paid a dividend of $1.25 and expects to have it grow at 10%...

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ZZR Corp. just paid a dividend of $1.25 and expects to have it grow at 10%...

ZZR Corp. just paid a dividend of $1.25 and expects to have it grow at 10% for the 5 coming years and then growing at 3% indefinitely thereafter. If stocks of similar risk earn 12% effective annual return, what should be the stock price of ZZR Corp.:

Question 24 options:

	$20.94
	$19.00
	$5.38
	$11.80

business finance

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Answer 1

Answer #1

rate positively ..


i	ii		iii	iv=ii+iii	v	vi=v*iv
year	Dividend		Terminal value	Total cash flow	PVIF @ 12%	present value
1	1.38			1.38	0.892857	1.23
2	1.51			1.51	0.797194	1.21
3	1.66			1.66	0.71178	1.18
4	1.83			1.83	0.635518	1.16
5	2.01		23.04	25.05	0.567427	14.22
						19.00

Computation of terminal value = expected dividend in year 3/(required rate - growth rate)
			=2.01*103%/(12%-3%)
			23.04

Price =		19.00

ans =		19.00

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Answer 2

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