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Nonconstant Growth Stock Valuation Assume that the average firm in your company's industry is expected to grow...

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Finance


Nonconstant Growth Stock Valuation

Assume that theaverage firm in your company's industry is expected to grow at aconstant rate of 4% and that its dividend yield is 7%. Your companyis about as risky as the average firm in the industry and just paida dividend (D0) of $2.25. You expect that the growthrate of dividends will be 50% during the first year(g0,1 = 50%) and 20% during the second year(g1,2 = 20%). After Year 2, dividend growth will beconstant at 4%. What is the estimated value per share of yourfirm’s stock? Do not round intermediate calculations. Round youranswer to the nearest cent.

$

Answer & Explanation Solved by verified expert
4.0 Ratings (559 Votes)
Step 1 Calculate Cost of equity Our stock has same risky as the average firm in the industry so we can use industry growth dividend yield for    See Answer
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