25.5k views
0 votes
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 6 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? a. $62.77 b. $7710 c. $73.01 d. $58.21 e. $66.50

User Juandesant
by
8.1k points

1 Answer

1 vote

Answer:

Current Market value of the stock at 8.5% return: 105.88

Step-by-step explanation:

We will calculate the present value of the dividends:


\left[\begin{array}{ccc}Year&amp;Cash \: Flow&amp;PV\\</p><p>1&amp;1.722&amp;1.59\\</p><p>2&amp;2.12&amp;1.8\\</p><p>3&amp;2.61&amp;2.04\\</p><p>4&amp;3.21&amp;2.32\\</p><p>5&amp;3.40&amp;98.13\\</p><p>&amp;&amp;105.88\\</p><p>\\\end{array}\right]

We will do the following:

each dividends we multiply by the previous, by the grow rate of 23%

D1 1.40 x ( 1 + 23%) = D2 = 1.722

D2 1.722 x ( 1 + 23%) = D3 = 2.12

...

Then after the four years we calculate the gordon model for the infinite series of dividends


(divends)/(return-growth) = Intrinsic \: Value

3.95/(0.085-0.06) = 158

Then calculate the present of each dividends applying the present value of a lump sum


(Principal)/((1 + rate)^(time) ) = PV


(1.722)/((1 + 0.085)^(1) ) = PV_(div1)

PV div1 = 1.59


(2.12)/((1 + 0.085)^(2) ) = PV_(div2)

PV div2 = 1.8


(2.61)/((1 + 0.085)^(3) ) = PV_(div3)

PV div3 = 2.04

...

Then we add them and get the present value of the stock

User Shingo Fukuyama
by
7.9k points

No related questions found

Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

9.4m questions

12.2m answers

Categories