The Rockford Boat Company just declared a dividend of $4 per share. It is expected that the company's earnings and dividends will grow at a rate of 20% next year, 15% the following year and 11% the year after that. After that, earnings and dividends are expected to grow at a constant rate of 3%. Required: If you expect a rate of return of 10% on this stock, what would you expect to pay for a share of Rockford Boat Company stock today?
| Fair market value of the stock today is the PV of the expected dividends | ||||
| when discounted at the required rate of return of 10%. | ||||
| Year | Dividend | PVIF at 10% | PV at 10% | |
| 0 | $ 4.000 | |||
| 1 | $ 4.800 | 0.90909 | $ 4.36 | |
| 2 | $ 5.520 | 0.82645 | $ 4.56 | |
| 3 | $ 6.127 | 0.75131 | $ 4.60 | |
| Sum of PV of dividends of years 1 to 3 | $ 13.53 | |||
| Continuing value of dividends at t3 = 6.127/(0.10-0.03) = | $ 87.53 | |||
| PV of continuing value = 87.53*0.75131 = | $ 65.76 | |||
| Market value of the stock today = 13.53+65.76 = | $ 79.29 |
The Rockford Boat Company just declared a dividend of $4 per share. It is expected that...
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