MC Qu. 9-A5 Combined Communications is a new firm in a rapidly growing... Combin

Question

MC Qu. 9-A5 Combined Communications is a new firm in a rapidly growing... Combined Communications is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 23 percent a year for the next 4 years and then decreasing the growth rate to 5 percent per year. The company just paid its annual dividend in the amount of $1.40 per share. What is the current value of one share of this stock if the required rate of return is 8.50 percent?

Which one?

$62.77

$77.10

$73.01

$58.21

$66.50

Explanation / Answer

current value of one share of this stock

=(1.40*1.23^1)/(1+8.50%)^1+(1.40*1.23^2)/(1+8.50%)^2+(1.40*1.23^3)/(1+8.50%)^3+(1.40*1.23^4)/(1+8.50%)^4+((1.40*1.23^4*1.05)/(8.50%-5%))/(1+8.50%)^4

=77.10

the above is the answer

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