Question

Assume Highine Company has jst paid an annual dividend of $094 Analysts are predicting an 11.7% per year growth rate in eamings over the next fve years Aher then, Highine's eamings are expected to grow at the ouret industry average of 4.8% per year. If Highline's eqity cost of capital is 8.5% per year and is dividend payout ratio remains constant, for whal price does thee dividend discount model predict Highine stock shodd sel? The value of Highline's stock is $ (Round to the nearest cent)

Answer 1

We need to solve the following equation:

Do X (1+93). Do x (1 +95) (1+r) E- Do X (1+gs) Do (1+93)2 Price = (1+r) 1 (1+r)2 Do X (1+98) Do X (1+98) *(1 +9L) (1+r)5(r -9) (1 + 713_ . (1+r)5 t

Here D₀ = Current dividend, g_s = short term growth rate, g_L = long term growth rate, r = cost of equity

- + 0.94 x (1 + 0.117) 0.94 x (1 + 0.117)2 0.94 x (1 + 0.117)3 Price =- (1 + 0.085)1 (1+0.085)2 (1+0.085)3 0.94 x (1 + 0.117)4 0.94 x (1 + 0.117) 0.94 x (1 + 0.117) (1+0.048) (1 + 0.085)4 (1+0.085)5 ' (1+0.085)5(0.085 – 0.048)

Price = 35,92

So the price becomes $35.92