Question

Cougar Auto is expecting its earnings and dividends to grow at a rate of 19% over the next 5 years. After the period, the firm is expecting to grow at the industry average of 5% indefinitely. If the firm recently paid a dividend of $1.25, and the required rate of return is 12%, what is the most you should pay for this company's stock

Answer 1

amount pay = 32.91

Step-by-step explanation:

given data

grow at a rate g = 19% = 0.19

time = 5 year

expecting to grow Eg = 5 % = 0.05

paid a dividend D = $1.25

required rate of return Rg = 12%

solution

we get here amount that pay for company's stock is express as

amount =
`D * (1+g)/(1+Rg) + D * ((1+g)/(1+Rg))^2 + D * ((1+g)/(1+Rg))^3 + D * ((1+g)/(1+Rg))^4 + D * ((1+g)/(1+Rg))^5 + D * ((1+g)/(1+Rg))^5 * (1+Eg)/(Rg-Eg) \ \ \ \ \ \ \ \ \ ..................................1`

put here value and we get

`1.25 * (1+0.19)/(1.12) + 1.25 * ((1+0.19)/(1.12))^2 + 1.25 * ((1+0.19)/(1.12))^3 + 1.25 * ((1+0.19)/(1.12))^4 + 1.25 * ((1+0.19)/(1.12))^5 + 1.25 * ((1+0.19)/(1.12))^5 * (1+0.5)/(0.12-0.05)`

solve it we get

amount pay = 32.91