Current value of stock. Given information: Expected dividend rate = $2per share Expected growth of dividend = 15% (for first three years) Thereafter dividend growth = 10% (for 2 years) Calculation of current value of stock: Year Earnings ($) Dividends ($) 0 0.00 0.00 1 0.00 0.00 2 2 0.45 3 2(1.15) 2.30 4 2.30(1.15) 2.645 5 2.645(1.15) 3.042 6 3.042(1.10) 3.346 P 6 = e s t i m a t e d E P S x e s t i m a t e d P / E m u l t i p l e = $ 7 x 15 = $ 105 P 0 = F V n ( P V I F i , n ) Here, FV refers to future value of investment, i is interest rate, n is number of periods, PVIF refers to a used for calculation. P 0 = $ 2 P V I F 0.15 , 2 + $ 2.30 P V I F 0.15 , 3 + $ 2.645 P V I F 0.15 , 4 + $ 3.042 P V I F 0.15 , 5 + $ 3.346 + $ 105 P V I F 0.15 , 6 = $ 52.89 Hence, a person can pay for the stock is $52.89

Question

Want to see the full answer?

Answer 1

Question

Chapter 7, Problem 25P

Summary Introduction

To determine: Current value of stock.

Given information:

Expected dividend rate = $2per share

Expected growth of dividend = 15% (for first three years)

Thereafter dividend growth = 10% (for 2 years)

Calculation of current value of stock:

Year Earnings ($) Dividends ($)
0 0.00 0.00
1 0.00 0.00
2 2 0.45
3 2(1.15) 2.30
4 2.30(1.15) 2.645
5 2.645(1.15) 3.042
6 3.042(1.10) 3.346

P6= estimated EPS x estimated P/E multiple = $7 x 15 = $105

P0=FVn(PVIFi,n)

Here,

FV refers to future value of investment,

i is interest rate,

n is number of periods,

PVIF refers to a used for calculation.

P0=$2PVIF0.15,2+$2.30PVIF0.15,3+$2.645PVIF0.15,4+$3.042PVIF0.15,5+$3.346+$105PVIF0.15,6=$52.89

Hence, a person can pay for the stock is $52.89

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $4.25000 dividend at that time (D = $4.25000) and believes that the dividend will grow by 22.10000% for the following two years (D, and D₂). However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate of 4.08000% per year. Goodwin's required return is 13.60000%. Fill in the following chart to determine Goodwin's horizon value at the horizon date (when constant growth begins) and the current intrinsic value. To increase the accuracy of your calculations, do not round your intermediate calculations, but round all final answers to two decimal places. Term Horizon value Current intrinsic value Value Assuming that the markets are in equilibrium, Goodwin's current expected dividend yield is $69.27 $45.98 Goodwin has been very successful,…

Sunland, Inc., management expects to pay no dividends for the next six years. It has projected a growth rate of 25 percent for the next seven years. After seven years, the firm will grow at a constant rate of 5 percent. Its first dividend, to be paid in year 7, will be $3.71. If the required rate of return is 18 percent, what is the stock worth today? (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.20.) Worth of stock$Type your answer here

Sunland, Inc., management expects to pay no dividends for the next six years. It has projected a growth rate of 25 percent for the next seven years. After seven years, the firm will grow at a constant rate of 5 percent. Its first dividend, to be paid in year 7, will be $3.71. If the required rate of return is 18 percent, what is the stock worth today? (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)