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40 Growing, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid a...

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Growing, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid a dividend of $3.70. You believe that dividends will grow at a rate of 21.0% per year for three years, and then at a rate of 10.0% per year thereafter. You expect that the stock will sell for $127.69 in three years. You expect an annual rate of return of 17.0% on this investment. If you plan to hold the stock indefinitely, what is the most you would pay for the stock now?

$91.60
$66.84
$76.19
$56.45
$82.48
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Answer #1

Calculate the current price of the stock as follows 1 Year Particulars Amount PVF @ 17% | PV of the amount 01 Dividend 1 $3.7000 $4.4770 0.854700855 $5.4172| 0.730513551 $6.5548 0.624370556 $3.8265 $3.9573 $4.0926 $64.3124 $76.19 4 3 $103.0036 0.624370556 Current price Therefore, willing to pay price is $76.19 Formulas PV of the amount 1 Year Particulars Amount 2 0Dividend 3.7 PVF @ 17% -c2*(1+21%) -c3*(1+21%) -C4*(1+21%) (C5*(1+10%))/(17%-10%) |-1/(1+17%)A6-C6*D6 -1/(1+17%)A3-C3*D3 -1/(1+17%)*A4 C4*D4 -1/(1+17%)*A5-C5*D5 4 2 Current price SUM(E3:E6)

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