The Richter Company a technology company has been

growing rapidly #3576

The Richter Company, a technology company, has been growing rapidly. After examining the
company's operations very carefully, analysts at Meril Link have estimated that dividends and
earnings will grow at a rate of 22 percent a year for the next eight years, followed by 16 percent
growth for another six years. After 14 years, the expected growth rate is 5 percent the risk-free
rate appropriate for this analysis is 5.5 percent, and the expected return on the market is 10.5
percent. The beta for Richter is 1.1. It currently pays a dividend of $1.10. As major stockholders,
the Richter family has asked you to estimate the intrinsic value of this stock today. Note the
following: 1. Calculate the required rate of return in cell H2 using the CAPM. 2. Calculate the
dollar amount of each dividend for the first 14 years in cells B5 through B18, and the present
value of these amounts in cells C5 through C18. Be sure to allow for the change in growth rates
in year 9. 3. In cell G19, calculate the price of the stock at the beginning of year 15, using the
then-constant growth rate of 5 percent. 4. In cell G20, discount the price found in 3) back to
today using the proper nu periods for discounting. 5. Sum the present value of the dividends in
cell C21. Add to this the present value price found in 4) by putting this value in C22. 6. In cell
C23, add the values found in 5) in cell C24. Price at beginning of Year 15 = PV of Price today =
Sum of PV of dividends for first 14 years + PV of Price at Beginning of Year 15 Sum of PV of
dividends and PV of price View Solution:
The Richter Company a technology company has been growing rapidly

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