The Bell Weather Co. is a new firm in a rapidly growing industry. The company is
ID: 2653069 • Letter: T
Question
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 19 percent a year for the next 4 years and then decreasing the growth rate to 4 percent per year. The company just paid its annual dividend in the amount of $1.90 per share. What is the current value of one share of this stock if the required rate of return is 7.40 percent?
$116.55
$97.48
$87.59
$118.45
$99.38
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 19 percent a year for the next 4 years and then decreasing the growth rate to 4 percent per year. The company just paid its annual dividend in the amount of $1.90 per share. What is the current value of one share of this stock if the required rate of return is 7.40 percent?
Explanation / Answer
Current value of one share of this stock = D1/(1+r) + D2/(1+r)^2+ D3/(1+r)^3+ D4/(1+r)^4+ (D5/(r-g))/(1+r)^4
D1 = 1.90*1.19
D2 = 1.90*1.19^2
D3 = 1.90*1.19^3
D4 = 1.90*1.19^4
D5 = 1.90*1.19^4*1.04
r = 7.4%
g = 4%
Current value of one share of this stock = 1.90*1.19/1.074 + 1.90*1.19^2/1.074^2 + 1.90*1.19^3/1.074^3 + 1.90*1.19^4/1.074^4 + (1.90*1.19^4*1.04/(7.4%-4%))/1.074^4
Current value of one share of this stock = $ 97.48
Answer
B) $97.48
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