Question

Question 4 12 pts Q4: Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value? (12 points) Year 0 1 2 3 4 5 6 Growth rate NA NA NA NA 50.00% 25.00% 8.00% Dividends $0.00 $0.00 $0.00 $0.25 $0.38 $0.47 $0.51

Answer 1

D E F G H А в с 1 Computing Value of the Share at Y = 0 2 3. According to the Dividend Discount Model for valuing price of a stock present 4 value of dividends discounted at required return rate shall be the expected 5 price of the stock. Therefore 6 IV = D1/Re - 9 7 8 where : 9 D, is dividend available in next year 10 Re is the required rate of return 11 g is the growth rate 12 13 We have been given: 14 D. $0 15 Re 11% Constant Growth Rate beyond 5th year 8% 17 18 Step: 1 First 5 Years 19 Discounting Present Value 20 Years Dividend Factor@11% of Dividends 21 1 0.9009 2 0.8116 23 3 0.25 0.7312 0.18 24 4 0.38 0.6587 0.25 25 5 0.47 0.5935 0.28 26 Total 0.71 27 PV of First 5 years $ 0.71 16 22 28

29 $ 0.51 $ 0.51 /0.11 -0.08 $ 17 II mm 30 Step: 26th year and beyond 31 32 DE 33 Ps 34 35 36 PV of Ps 37 38 39 Step: 3 Value of the Stock 40 11 $ 17 * 0.5935 $ 10.09 11 41 Step 1 + Step 2 $ 0.71 + $ 10.09 $ 10.80 42 43 44 So the answer is $ 10.80. 45 46 Please Upvote.