Question

4. The current stock price of ABC, Corp. is $300 per share. ABC, Corp. just paid an annual per share dividend of $3. Over the past 5 years, this dividend has been grown annually at a rate of 35%. A respected analyst assumes that the current growth rate of dividends will hold up for the next 5 years, after which dividend growth will slow to 8% annually. Use the solver in Excel to compute the cost of equity?

A. 32.76% B. 12.88% C. 11.52% D. 11.15%

Answer 1

D. 11.15%

C E F G H I J K L B cost of equity 0.1 (initial guess) Solver Parameters year 1 Set Objective: SDS12 Dividend Present value 4 .05 3.681818182 2 5.4675 4.518595041 3 7.381125 5.54554846 4 9.964519 6.805900382 5 13.4521 8.352695924 To: O Max Min Value Of: 300 By Changing Variable Cells: SCS1 10 Terminal value at year 5 726.4134 451.0455799 Subject to the Constraints: 12 Present value = 479.9501379; Add Change Delete Reset All Load/Save Make Unconstrained variables Non-Negative Select a Solving GRG Nonlinear Method: Options Solving Method Select the GRG Nonlinear engine for Solver Problems that are smooth nonlinear. Select the LP Simplex engine for linear Solver Problems, and select the Evolutionary engine for Solver problems that are non-smooth. Help sove Close clase


cost of equity 0.111477 11.15% year Dividend Present value 4.05 3.643800756 2 5.4675 4.425761318 3 7.381125 5.375530812 4 9.964519 6.52912108 5 13.4521 7.93027211 10 Terminal value at year 5 461.5548 272.0954552 11 299.9999413 12 Present value = 13

А cost of equity 0.111476798730908 =C1 year m Dividend =3*1.354B4 =3*1.35^B5 =3*1.354B6 =3*1.35^B7 =3*1.35^B8 Present value =C4/(1+$C$1)^B4 =C5/(1+$C$1)^B5 =C6/(1+$C$1)^B6 =C7/(1+$C$1)^B7 =C8/(1+$C$1)"B8 in 10 Terminal value at year 5 =C8*1.08/($C$1-0.08) =C10/(1+$C$1)45 11 12 Present value = 13 =SUM(D4:08)+D10

Please do rate me and mention doubts, if any, in the comments section.