Question

CX Enterprises has the following expected dividends: $1 in one year, $1.15 in two years, and $1.25 in three years. After that, its dividends are expected to grow at 4% per year forever (so that year 4’s dividend will be 4% more than $1.25 and so on). If CX’s equity cost of capital is 12%, what is the current price of its stock? Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section.

Answer 1

Answer is 14.27.

Refer below for explanation.

Step-by-step explanation:

As per question,

1 in one year,

$1.15 in two years,

$1.25 in three years. After that, its dividends are expected to grow at 4% per year forever (so that year 4’s dividend will be 4% more than $1.25 and so on). If CX’s equity cost of capital is 12%

Solution:

4 years dividend= 1.04×1.25=1.30

3 years value = 1.30 / ( 8%) = 16.25

Stock value now = 1 / (1+12%)^1 + 1.15 / (1+12%)^2 + 1.25 / (1+12%)^3 + 16.25 / (1+12%)^3 = 14.27

Answer 2

Dividend in Year 4 = 1.30

Terminal value at year 3 = 16.25

Stock price today = 14.27

Step-by-step explanation:

Dividend in Year 4 = 1.25 * 1.04 = 1.30

Terminal value at year 3 = 1.30 / ( 12% - 4%) = 16.25

Stock price today = 1 / (1+12%)^1 + 1.15 /(1+12%)^2 + 1.25 / (1+12%)^3 + 16.25 / (1+12%)^3 = 14.27