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 (Do-$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. You must show calculations. You may use Excel financial functions or manual calculations.

Explanation / Answer

D1 = D0 (1.08)1 = 1.8 (1.08)1 = 1.8 x 1.08 = 1.944

D2 = D0 (1.08)2 = 1.8 (1.08)2 = 1.8 x 1.1664 = 2.0995

D3 = D0 (1.08)3 = 1.8 (1.08)3 = 1.8 x 1.2597 = 2.2675

PV of D1 = D1 / (1.11) = 1.944 / 1.11 = 1.7514

PV of D2 = D2 / (1.11)2 = 2.0995 / 1.2321 = 1.70400

PV of D3 = D3 / (1.11)3 = 2.2675 / 1.3676 = 1.6580

PV of Dividends = 1.7514 + 1.70400 + 1.6580 = 5.1134

Part A.)

D4 = D3 (1.05) = 2.2675 (1.05) = 2.380875

P3 = D4 / (R - g) = 2.380875 / (.11 - .05) = 39.6813

PV of P3 = 39.6813 / (1.11)3 = 29.0146

Current Price = PV of Dividends + PV of P3 = 5.1134 + 29.0146 = 34.1280

Part B.)

D4 = D3 (1) = 2.2675 (1) = 2.2675

P3 = D4 / (R - g) = 2.2675 / (.11 - 0) = 20.6136

PV of P3 = 20.6136 / (1.11)3 = 15.0725

Current Price = PV of Dividends + PV of P3 = 5.1134 + 15.0725 = 20.1859

Part C.)

D4 = D3 (1.1) = 2.2675 (1.1) = 2.49425

P3 = D4 / (R - g) = 2.49425 / (.11 - .10) = 249.425

PV of P3 = 249.425 / (1.11)3 =182.3774

Current Price = PV of Dividends + PV of P3 = 5.1134 + 182.3774 = 187.4908

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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