The earnings and dividends of a firm are expected to grow at an annual rate of 1

Question

The earnings and dividends of a firm are expected to grow at an annual rate of 15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year thereafter.  The firm currently pays a dividend of $0.50 per share (D0 = $0.50). What is the value of this firm

The earnings and dividends of a firm are expected to grow at an annual rate of 15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year thereafter. The firm currently pays a dividend of $0.50 per share (D0 = $0.50). What is the value of this firm's stock to an investor who requires a 14 percent rate of return?

Explanation / Answer

Hi,

Please find the answer as follows:

D1 = .50*(1.15) = .575

D2 = .575*(1+.15) = .661

D3 = .661*(1+.15) = .760

D4 = .760*(1+.15) = .874

P4 = .944/(.14 -.08) = 15.73

P0 = .575/(1+.14)^1 + .661/(1+.14)^2 + .760/(1+.14)^3 + .874/(1 +.14)^4 + 15.73/(1+.14)^4 = 11.356 or 11.36

Answer is 11.356 or 11.36

Thanks.

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