A fast-growing firm recently paid a dividend of $0.40 per share. The dividend is expected to increase at a 25 percent rate for the next four years. Afterwards, a more stable 11 percent growth rate can be assumed. If a 12.5 percent discount rate is appropriate for this stock, what is its value?

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Helena Andrade

16 May, 18:57

A fast-growing firm recently paid a dividend of $0.40 per share. The dividend is expected to increase at a 25 percent rate for the next four years. Afterwards, a more stable 11 percent growth rate can be assumed. If a 12.5 percent discount rate is appropriate for this stock, what is its value?

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Justice Robinson · Answer 1

Value of Stock = 0.4*1.25/1.125 + 0.4*1.25^2/1.125^2 + 0.4*1.25^3/1.125^3 + 0.4*1.25^4/1.125^4 + (0.4*1.25^4*1.11 / (12.5%-11%)) / 1.125^4

Value of Stock = $ 47.21