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  • Variable Growth - CF

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    rajsacks
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    The document describes a stock that pays an initial dividend of $0.35 per share, with dividends expected to grow 20% for the next 3 years and then 12% thereafter. It asks the reader to calculate the current value of the stock given a 13% discount rate, without using a formula. The expert answer outlines the calculation steps: it finds the dividends over the next 3 years growing at 20%, calculates the value after year 3 growing at 12%, and sums the present values of the dividends and future value, determining the current stock value is approximately $48.13.

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    VARIABLE GROWTH - CF

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    The document describes a stock that pays an initial dividend of $0.35 per share, with dividends expected to grow 20% for the next 3 years and then 12% thereafter. It asks the reader to calculate the current value of the stock given a 13% discount rate, without using a formula. The expert answer outlines the calculation steps: it finds the dividends over the next 3 years growing at 20%, calculates the value after year 3 growing at 12%, and sums the present values of the dividends and future value, determining the current stock value is approximately $48.13.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    12 views1 page

    Variable Growth - CF

    Uploaded by

    rajsacks
    The document describes a stock that pays an initial dividend of $0.35 per share, with dividends expected to grow 20% for the next 3 years and then 12% thereafter. It asks the reader to calculate the current value of the stock given a 13% discount rate, without using a formula. The expert answer outlines the calculation steps: it finds the dividends over the next 3 years growing at 20%, calculates the value after year 3 growing at 12%, and sums the present values of the dividends and future value, determining the current stock value is approximately $48.13.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
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    Question:

    VARIABLE GROWTH A fast-growing firm recently paid a dividend of $0.35 per share. The dividend
    is expected to increase at a 20 percent rate for the next three years. Afterwards, a more stable 12
    percent growth rate can be assumed. If a 13 percent discount rate is appropriate for this stock, what
    is its value?
    Please do not copy the answer from the textbook and put in formula format. Please write it out so
    that I can get copy and paste into a calculator.
    i.e-- 0.4*1.25/1.125 + 0.4*1.25^2/1.125^2 + 0.4*1.25^3/1.125^3 +0.4*1.25^4/1.125^4 +
    (0.4*1.25^4*1.11/(12.5%-11%))/1.125^4

    Expert Answer
     D1=(0.35*1.2)=0.42

    D2=(0.42*1.2)=0.504

    D3=(0.504*1.2)=0.6048

    Value after year 3=(D3*Growth Rate)/(Discount rate-Growth rate)

    =(0.6048*1.12)/(0.13-0.12)

    =$67.7376

    Hence value of stock=Future dividend and value*Present value of discounting factor(rate%,time period)

    =0.42/1.13+0.504/1.13^2+0.6048/1.13^3+$67.7376/1.13^3

    =$48.13(Approx).

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