A7X Corp. just paid a dividend of $1.30 per share. The
dividends are expected to grow...
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Finance
A7X Corp. just paid a dividend of $1.30 per share. Thedividends are expected to grow at 35 percent for the next 8 yearsand then level off to a growth rate of 6 percent indefinitely.
If the required return is 14 percent, what is the price of thestock today?
Multiple Choice
$92.39
$2.93
$90.58
$88.77
$66.62
Answer & Explanation
Solved by verified expert
3.7 Ratings (502 Votes)
Required rate=
14.00%
Year
Previous year dividend
Dividend growth rate
Dividend current year
Horizon value
Total Value
Discount factor
Discounted value
1
1.3
35.00%
1.755
1.755
1.14
1.5395
2
1.755
35.00%
2.36925
2.36925
1.2996
1.82306
3
2.36925
35.00%
3.1984875
3.1984875
1.481544
2.15889
4
3.1984875
35.00%
4.317958125
4.317958125
1.68896016
2.55658
5
4.317958125
35.00%
5.829243469
5.829243469
1.925414582
3.02753
6
5.829243469
35.00%
7.869478683
7.869478683
2.194972624
3.59
7
7.869478683
35.00%
10.62379622
10.62379622
2.502268791
4.24567
8
10.62379622
35.00%
14.3421249
190.033
204.3751249
2.852586422
71.64555
Long term growth rate (given)=
6.00%
Value of Stock =
Sum of discounted value =
90.58
Where
Current dividend =Previous year dividend*(1+growth
rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 8 *(1+long term growth
rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor
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