a) Let us assume dividend initially at 1st year is D1, Dividend at 2nd year is D2, Dividend at kth year is Dk so on.
Likewise Present value initially is P0, Present value after 1 year is P1, Present value after Kth year is Pk so on.
Given Data, Annual Dividend(D0) = $10 M , Growth rate of G (10%) for 5 years, followed by growth rate of g(5%) thereafter. Interest rate (r) = 15%.
value of the company at the end of the k i.e. 5th year = D6 /(r-g)
= D5*(1+g)/(r-g)
= D0(1+G)5(1+g)/(r-g)
= $ 10M (1.1)5(1.05)/(15%-5%)
= $ 169,103,550
value of the company (P0) = D1/(1+r)1 + D2/(1+r)2 + D3/(1+r)3 + D4/(1+r)4 + (D5 +P5)/ (1+r)5
= (D1/r-G) * [1 - ((1+G)/(1+r))5] + P5/(1+r)5
= (11,000,000/.15-.10) * [1 - (1.1/1.15)5] + 169,103,550 / 1.155
= 43844217.13 + 84074350.92
= $ 127,918,568.10
Hence value of the company = $ 127,918,568.10
b) Let us assume dividend intially at 1st year is D1, Dividend at 2nd year is D2, Dividend at kth year is Dk so on.
Likewise Present value initially is P0, Present value after 1 year is P1, Present value after Kth year is Pk so on.
Growth rate of G for k years, followed by growth rate of g thereafter, interest rate = r%.
value of the company at the end of the kth year = Dk+1/(r-g)
= Dk*(1+g)/(r-g)
= D0(1+G)k(1+g)/(r-g)
value of the company (P0) = D1/(1+r)1 + D2/(1+r)2 + .......... + (Dk+Pk)/ (1+r)k
= (D1/r-G) * [1 - ((1+G)/(1+r))k] + Pk/(1+r)k
Hence the general formula for the value of the company satisfying a two stage growth model is
(D1/r-G) * [1 - ((1+G)/(1+r))k] + Pk/(1+r)k where D1 is the initial Dividend , growth rate of G for k years followed by growth rate of g thereafter for interest rate r%.
12/(Two-stage growth) It is common practice in security analysis to modify the basic div- idend growth...
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Question 3. Company BMI will experience a supernormal growth rate of 20% in the next two years. The growth rate will then level off to 4% from year 3 and beyond. The most recent dividend payment was $1.00 and the required rate of return for XYZ stock is! 10%. What is the intrinsic value of the BMI stock? Question 3 D1= D2= P2= PV div= PV price- Intrinsic Value
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please answe 1,3 and 11
not answers in pictures please
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