Question

1)

A7X Corp. just paid a dividend of $1.30 per share. The dividends are expected to grow at 30 percent for the next 9 years and then level off to a growth rate of 9 percent indefinitely.

If the required return is 13 percent, what is the price of the stock today?

2)

Burnett Corp. pays a constant $19 dividend on its stock. The company will maintain this dividend for the next 6 years and will then cease paying dividends forever.

If the required return on this stock is 10 percent, what is the current share price?

Answer 1

Solution: Q1 Year 2 m 4 5 Dividend Dividend calculation a 1.69000 1.3*(1.311) 2 .19700 1.3*(1.342) 2.85610 1.3*(1.343) 3.71293 1.3*(1.314) 4.82681 1.3*(1.345) 6.27485 | 1.3*(1.346) 8.15731 1.3*(1.347) 10.60450 1.3*(1.348) 13.78585 1.3*(1.319) 375.66439 discount factor at 13%* b 0.88496 0.78315 0. 69305 0.61332 0.54276 0.48032 0.42506 0.37616 0.33288 0.33288 Current price PV a*b 1.50 1.72 1.98 2.28 2.62 3.01 3.47 3.99 4.59 125.05 150.20 8 9 P9* **Since growth is constant after year 3, P9=D10/(r-g) 13.78585*(1+0.09)/(0.13-0.09) 375.664390 P9= Price at the end of year 9 D9= Dividend at the end of year 10 g=growth rate *discount rate formula = 1/(1+r)^n

Q2 Year Dividend 1 19.00000 2) 19.00000 3) 19.00000 4 19.00000 5 19.00000 6) 19.00000 discount factor at 10% PV a*b 0.90909 17.27 0.82645 15.70 0.75131 14.27 0.68301 | 12.98 0.62092 11.80 0.56447 10.73 Current price 82.75