P7-14 Common stock value: Variable growth Lawrence Industries\' most recent annu

Question

P7-14 Common stock value: Variable growth Lawrence Industries' most recent annual dividend was $1.80 per share (D)-$1.80), and the firm's required return is 11%. Find the market value of Lawrence's shares when: a. Dividends are expected to grow at 8% annually for 3 years, followed by a 5% constant annual growth rate in years 4 to infinity. b. Dividends are expected to grow at 8% annually for 3 years, followed by a 0% constant annual growth rate in years 4 to infinity. Dividends are expected to grow at 8% annually for 3 years, followed by a 10 constant annual growth rate in years 4 to infinity c.

Explanation / Answer

a. Market Value $    34.16 Working: Market Value of firm is the present value of all dividends. 1) Present Value of 3 years dividend: Year Dividend Discount factor @11% Present Value 1 $       1.94         0.901 $       1.75 2 $       2.10         0.812 $       1.70 3 $       2.27         0.731 $       1.66 Total $       5.11 2) Terminal Value of dividend: Terminal Value = D3*(1+g)/(Ke-g) Where, = 2.27*(1+0.05)/(0.11-0.05) D3 $       2.27 = $    39.73 g 5% Ke 11% 3) Present value of terminal value: Present value of terminal value = $    39.73 x         0.731 = $    29.05 4) Present value of all dividends = $       5.11 + $    29.05 = $    34.16 b. Market Value $    20.19 Working: Market Value of firm is the present value of all dividends. 1) Present Value of 3 years dividend: Year Dividend Discount factor @11% Present Value 1 $       1.94         0.901 $       1.75 2 $       2.10         0.812 $       1.70 3 $       2.27         0.731 $       1.66 Total $       5.11 2) Terminal Value of dividend: Terminal Value = D3/Ke Where, = 2.27/0.11 D3 $       2.27 = $    20.61 Ke 11% 3) Present value of terminal value: Present value of terminal value = $    20.61 x         0.731 = $    15.07 4) Present value of all dividends = $       5.11 + $    15.07 = $    20.19 c. Market Value $ 187.69 Working: Market Value of firm is the present value of all dividends. 1) Present Value of 3 years dividend: Year Dividend Discount factor @11% Present Value 1 $       1.94         0.901 $       1.75 2 $       2.10         0.812 $       1.70 3 $       2.27         0.731 $       1.66 Total $       5.11 2) Terminal Value of dividend: Terminal Value = D3*(1+g)/(Ke-g) Where, = 2.27*(1+0.10)/(0.11-0.10) D3 $       2.27 = $ 249.70 g 10% Ke 11% 3) Present value of terminal value: Present value of terminal value = $ 249.70 x         0.731 = $ 182.58 4) Present value of all dividends = $       5.11 + $ 182.58 = $ 187.69

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.