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Problem 7-12 Nonconstant Growth Stock Valuation Assume that the average firm in your company's industry is...

Problem 7-12
Nonconstant Growth Stock Valuation

Assume that the average firm in your company's industry is expected to grow at a constant rate of 6% and that its dividend yield is 8%. Your company is about as risky as the average firm in the industry and just paid a dividend (D0) of $3. You expect that the growth rate of dividends will be 50% during the first year (g0,1 = 50%) and and 25% during the second year (g1,2 = 25%). What is the required rate of return on your company’s stock? What is the estimated value per share of your firm’s stock?

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Answer #1

18 B21 - X V fx =+B20*1.06 A B C D PVIF @ 14% Present value 19 D1 $ 4.50 0.877 $ 3.95 20 D2 5.63 0.769 $ 4.33 21 D3 $ 22 Hori

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