Ceebros Builders is expanding very fast and is expected to grow at a rate of 25

Question

Ceebros Builders 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. With this information answer the following questions. 1. Calculate the present value of the dividends during the fast-growth period? 2. What is the value of the stock at the end of the fast-growth period? (Period 4) 3. What is the value of the stock today? 4. Would today's stock 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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