26 27 28 29 30 3 Delta Company has some very exciting prospects in the near futu

Question

26 27 28 29 30 3 Delta Company has some very exciting prospects in the near future. As a result it is expected to grow at a rate of 20% for the next y 31 years. After the year it will grow at 7% indefinitely. The required rate of return on the stock is currently 14 o % and Delta paid adis den of 32 $2.60 (G.e., Do ) recently. What should the value of Delta's stock per share be for today? Please answer this question using the following 33 worksheet template. Also, make sure to show all of your work. (Hint: Check i Sunsetbuilders Two Growth Phase Model.xis (Supplemental Resources) and slide pates 8 and 9 of M04L02 Lecture Notes Review the case of Sunsetbuilder) 35 36 37 38 Required rate or return (Discount rate) 14% 40 Growth Rate 20% 42 43 44 Dividends 45 Terminal Value (TV) 46 Present values 47 48 49 PV of D1 50 PV of D2 51 PV of TV DO D1 D2 D3 52 Value of Stock as of Year 0 53 54 56 ll Risk Ret CAPM II. CAPM.Portfolio Beta IV.Stock Valuation

Explanation / Answer

D0 = $2.60

Growth rate for next 2 years is 20%, followed by a constant growth rate (g) of 7%

D1 = $2.60 * 1.20 = $3.12
D2 = $3.12 * 1.20 = $3.74
D3 = $3.74 * 1.07 = $4.00

Required Rate of Return, r = 14%

Terminal Value, TV = D3 / (r - g)
Terminal Value, TV = $4.00 / (0.14 - 0.07)
Terminal Value, TV = $57.14

PV of D1 = $3.12/1.14
PV of D1 = $2.74

PV of D2 = $3.74/1.14^2
PV of D2 = $2.88

PV of TV = $57.14/1.14^2
PV of TV = $43.97

Value of Stock = PV of D1 + PV of D2 + PV of TV
Value of Stock = $2.74 + $2.88 + $43.97
Value of Stock = $49.59

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