Question

Problem 7-12 Question 12 of 21 Check My Work eBook Problem Walk-Through Problem 7-12 Nonconstant Growth Stock Valuation Assume that the average firm in your company's industry is expected to grow ata constant rate of 7% and that its dividend yield is 5%. Your company is about as risky as the average firm in the industry and just paid a dividend (Do) of $1.5. You expect that the growth rate of dividends will be 50% during the first year (90.1 50%) and 30% during the second year (91,2-30%). After Year 2, dividend growth will be constant at 7%. What is the estimated value per share of your firm's stock? Do not round intermediate calculations. Round your answer to the nearest cent. Check My Work Icon Key

Answer 1

Required Return, r = Dividend Yield + Growth Rate
Required Return, r = 5% + 7%
Required Return, r = 12%

D0 = $1.50

Growth rate during next two years is 50% and 30%, followed by a constant growth rate (g) of 7%

D1 = $1.50 * 1.50
D1 = $2.25

D2 = $2.25 * 1.30
D2 = $2.925

D3 = $2.925 * 1.07
D3 = $3.12975

P2 = D3 / (r - g)
P2 = $3.12975 / (0.12 - 0.07)
P2 = $62.595

P0 = $2.25 / 1.12 + $2.925 / 1.12^2 + $62.595 / 1.12^2
P0 = $54.24

So, estimated value per share is $54.24