Red Corporation stock has an expected return of 12.36% per year (effective). Div
ID: 2755235 • Letter: R
Question
Red Corporation stock has an expected return of 12.36% per year (effective). Dividends are paid semiannually and are currently growing at a rate of 7% every six (6) months. The last dividend, $5, was paid 4 months ago. Following the dividend paid thirty-two (32) months from now, dividends are expected to grow at a rate of 6% every six (6) months. Following the dividend paid seventy-four (74) months from now, dividend frequency is changed to a yearly dividend payment and the growth rate is expected to decrease at a rate of 7% every year forever. What should Red's stock be selling for todayExplanation / Answer
Assuming 2 months from Now as first Half Year Half Year Periods Half Yearly Dividend Discount Facotr@6.18% PV of Half Year Dividends 1 5.35 0.9418 5.039 2 5.72 0.8870 5.078 3 6.13 0.8354 5.117 4 6.55 0.7867 5.156 5 7.01 0.7409 5.196 6 7.43 0.6978 5.187 7 7.88 0.6572 5.178 8 8.35 0.6190 5.170 9 8.85 0.5829 5.161 10 9.38 0.5490 5.152 11 9.95 0.5170 5.143 12 10.54 0.4870 5.135 Total of PV = 61.712 on 12th year Annual dividend = $ 21.09 On 12Th year end expected dividend growth =-7% Expected value of share at 12th year end =21.09*0.93/(0.1236+0.07) = $ 101.31 Discont factor at 12 th year @12.36% = 0.2470 PV after 2 months for share value after 12 years= 25.022 Total PV of dividends and share value after 2 months= $ 86.73 Share value after 2 months from now = $ 86.73 Share value now @discount rate 12.36% pa =86.73/1.0206= $ 84.98 so current share value of Red Corporation = $ 84.98
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