Question

Long Life Insurance Inc just paid a dividend of $1.50, and projects supernormal growth at of 12% for the next three years. After that growth is expected to slow down to a normal 4% and go on at that rate for the foreseeable future. Similar stocks are earning a return of 10%. How much would you pay for a share of Long Live today?

Answer 1

To determine the value of a share of Long Life Insurance Inc today, we can use the dividend discount model (DDM) to calculate the present value of the dividends and the future stock price.

Step-by-step explanation:

To determine how much to pay for a share of Long Life Insurance Inc today, we need to calculate the value of its dividends and future growth. The dividends are projected to grow at a supernormal rate of 12% for the next three years and then at a normal rate of 4% thereafter. Similar stocks are earning a return of 10%. We can use the dividend discount model (DDM) to calculate the present value of the dividends and the future stock price. By discounting the projected dividends and stock price back to the present, we can determine the value of a share of Long Life today.