1.- You are trying to value a firm's equity. They pay quarterly dividends, with the nextdividend payment of $1.50 due later today. They will increase this dividend by $0.12every quarter for the next year. After that, they will increase dividends by 4.4% APR,compounded quarterly into perpetuity. The discount rate for this stock is 16.4% APR,compounded quarterly.a. What should be the price of this stock?b.You purchase the stock at the price above. But right after you purchase the stock(and before they are supposed to pay their dividend), they announce that they areincreasing the dividend today to $1.75. They also announce that they will increasetheir dividends by $0.16 each quarter for the next year, and then dividends will growby 4.8% APR, compounded quarterly, into perpetuity. If you decide to sellimmediately after this news (and before the dividend is paid later today), what returnwould you have earned during the few moments that you owned this stock?T

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Asked Nov 24, 2019
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I need help with this problem and how to set it up in excel with formulas. 

1.- You are trying to value a firm's equity. They pay quarterly dividends, with the next
dividend payment of $1.50 due later today. They will increase this dividend by $0.12
every quarter for the next year. After that, they will increase dividends by 4.4% APR,
compounded quarterly into perpetuity. The discount rate for this stock is 16.4% APR,
compounded quarterly.
a. What should be the price of this stock?
b.
You purchase the stock at the price above. But right after you purchase the stock
(and before they are supposed to pay their dividend), they announce that they are
increasing the dividend today to $1.75. They also announce that they will increase
their dividends by $0.16 each quarter for the next year, and then dividends will grow
by 4.8% APR, compounded quarterly, into perpetuity. If you decide to sell
immediately after this news (and before the dividend is paid later today), what return
would you have earned during the few moments that you owned this stock?T
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1.- You are trying to value a firm's equity. They pay quarterly dividends, with the next dividend payment of $1.50 due later today. They will increase this dividend by $0.12 every quarter for the next year. After that, they will increase dividends by 4.4% APR, compounded quarterly into perpetuity. The discount rate for this stock is 16.4% APR, compounded quarterly. a. What should be the price of this stock? b. You purchase the stock at the price above. But right after you purchase the stock (and before they are supposed to pay their dividend), they announce that they are increasing the dividend today to $1.75. They also announce that they will increase their dividends by $0.16 each quarter for the next year, and then dividends will grow by 4.8% APR, compounded quarterly, into perpetuity. If you decide to sell immediately after this news (and before the dividend is paid later today), what return would you have earned during the few moments that you owned this stock?T

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Expert Answer

Step 1

a) Since dividends are paid quarterly and both the growth rate and required rate of return are compounded quarterly, price of the stock can be calculated as below. Note: answer is highlighted in yellow, with all the workings shown separately.

Excel workings:

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A B C D 1 Periods Cash Flows PV factor @ 16.4%/4 Present Value of cash flows |=1/(1+(16.4%/4)) |=1/(1+(16.4%/4))^2 1/(1+(16.4%/ 4)^3 - 1/(1+(16.4 % /4) 4 -B2*C2 -B3 C3 =B4*C4 =B5*C5 ЕВ6*C6 |-SUM(D2:D6) 1.5+0.12 =B2+0.12 -B3+0.12 B4+0.12 =B5*(1+4.4% /4)(16.4%/4-4.4%/4) 1/(1+(16.4%/4)^4 2 1 з 2 4 3 5 4 6 4 Price today 7

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Step 2

Answer: Price of the stock today is $63.32

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A C 1 Periods Cash Flows PV factor@ 16.4%/4 Present Value of cash flows 0.960614793467820 S 0.922780781429221S 0.886436869768705 S 1S 2 S 3 S 4 S 1.62 1.55619596541787 2 1.74 1.60563855968685 1.86 1.64877257776979 4 1.98 0.851524370575125 1.68601825373875 5 0.851524370575125 $ Price today 4 S 66.726 56.81881515099580 6 63.31544050760900 7

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Step 3

b) When the first dividend is $1.75 and is expected to grow at 4.8% compounded qu...

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A B PV factor @ 16.4%/4 Present Value of cash flows =B12 C12 -B13 C13 -B14*C14 -B15 *C15 -B16*C16 |-SUM(D12:D16) 11 Periods Cash Flows 12 1 1.75+0.16 B12+0.16 -B13+0.16 =B14 +0.16 =B15*(1+4.8% /4) (16.4%/4-4.8%/4) |=1/(1+(16.4%/4)) 1/(1+(16.4% / 4)^2 |=1/(1+(16.4%/4)3 - 1 / ( 1+(16.4% /4)4 1/(1+(16.4%/4))^4 13 2 14 3 15 4 16 4 New Price 17

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