Question

Question 17 10 points Save Answer Canyon Buff Corp. has $200 million in cash and $400 million in market value of debt. The firm will pay dividends as follows: year 1 = $1 year 2 = $2, and year 3 = $4 (all are per share amounts). The dividends are expected to grow 5% per year thereafter. If the equity cost of capital is 15% and the weighted average cost of capital is 10%, then the current equity value per share is $__ Instruction: Type ONLY your numerical answer in the unit of dollars, NO $ sign needed, No comma sign. Round it to the nearest integer.

Answer 1

Let dividend in Year n be D_n

Given, D₁ = $1

D₂ = $2

D₃ = $4

Growth rate = g = 5%

Hence, D₄ = D₃(1+g) = 4(1+0.05) = $4.20

Equity cost of capital = r = 15%

Using Gordon's Growth formula,

P₃ = D₄/(r - g) = 4.20/(0.15 - 0.05) = $42.00

Hence, price of Stock now = P₀ = D₁/(1+r) + D₂/(1+r)² + D₃/(1+r)³ + P₃/(1+r)³

= 1/(1+0.15) + 2/(1+0.15)² + 4/(1+0.15)³ + 42/(1+0.15)³

= $32.63