An eCommerce Company is experiencing a period of rapid growth. Earnings and divi

Question

An eCommerce Company is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next 2 years, at 13% in the 3rd year, and at a constant rate of 6% thereafter. The company's last divident was $1.15 and the required rate of return on the stock is 12%.

Calculate the Present Value of dividends paid:

D1= $1.15 x 1.15% = $1.3225

D2= $ x =

D3= $ x =

PV of Dividends = __________ + __________ + ___________ = _____________

Find the Present Value of the company's stock price at the end of year 3:

P3^= D4/rs-g = D3(1+g)/rs-g

=______________

=

PV of P3^= ____________ = $

Sum the two components to find the value of stock today:

Value of current stock (P0)= $ + $ = $

1b. Calculate P1^ and P2^.

1c. Calculate the dividend yields and capital gains yields for years 1,2, and 3.

Year Dividend Yield + Capital Gains Yield = Total Return

1 $1.3225/$25.23 ~ 5.24% + ($26.93-$25.23)/$25.23~6.74% ~ 12%

2 ______________________ + _________________________ ~ _____ %

3 _______________________ + _________________________ ~ ______ %

Explanation / Answer

1.a) D1= $1.3225

D2= 1.3225 × 1.15= 1.5209

D3= 1.5209 × 1.13= 1.7186

PV of dividends = 1.3225 x (1/1.12)+1.5209x (1/1.12)2+1.7186 x (1/1.12)3= 1.1808+1.2125+1.2233

= $3.62

P3= D3 (1+g)/Ke-g

Or, P3= [1.7186 (1+0.06)]/.12-.06

Or, P3= $30.36

PV of P3= 30.36/(1.12)3

= $21.61

Sum of components to find the value of stock today= PV of dividends+ PV of P3= 21.61+3.62= $25.23

Please calculate b and c based on above calculation.

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