CeeBros Builderrs is expanding very fast and is expected to grow at a rate of 25

Question

CeeBros Builderrs is expanding very fast and is expected to grow at a rate of 25 Percent for the next four years. The company recently paid a dividend of $3.60 but is not expected to pay any dividends for the next three years. In year 4 management expects to pay a $5.61 dividend and thereafter to increase the dividend at a constant rate of 7.5 Percent. The required rate of return on such stocks is 17 percent. 1. Calculate the present value of the dividends during the fast-growth period.(round to two decimal places) 2. What is the value of the stock at the end of the fast-growth period. 3. What is the value of the stock today? 4. Would today"sstock value be affected by the length of time you intend to hold the stock?

Explanation / Answer

1. present value of the dividends during the fast-growth period = 5.61/1.17^4 =$2.99 2. value of the stock at the end of the fast-growth period = 5.61*1.075/(17%-7.5%) =$63.48 3. value of the stock today = 2.99 + 63.48/1.17^4 =$36.87 4. No, today's stock value does not get affected by the length of time you intend to hold the stock

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