A firm is expected to have a high growth rate in the next 2 years and a stable growth rate of 6% forever after that. Use the following information to find the stock value.
Inputs for the high growth period. Assume that the dividend payout ratio remains constant at the current level for the first two years.
Spring 2020 FINAN 575-A Intermediate Finance Chapter 9 Stock Valuation Two-Stage Dividend Discount Model Name 1. A firm is expected to have a high growth rate in the next 2 years and a stable growth rate of 6% forever after that. Use the following information to find the stock value. Inputs for the high growth period: Current earnings per share (EPSO) = $4.00 Current dividend per share (DPS)) = $1.00 Length of the high-growth period = 2 years Long-term bond rate (proxy for the risk-free rate) = 5% Market risk premium = 6% Beta of the stock for the high-growth period = 1.6 Return on assets (ROA) during the high growth period = 20% Debt to equity ratio during the high growth period = 0.70 Before-tax interest rate on debt for the high growth period = 7% Tax rate during the high growth period = 25% Inputs for the stable growth period: Stable growth rate forever = 6% Beta of the stock for the stable growth period = 1.1 Long-term bond rate (proxy for the risk free rate) = 5% Market risk premium = 6% Return on assets (ROA) during the stable growth period = 0.18 Debt to equity ratio during the stable growth period = 0.70 Before-tax interest rate on debt for the stable growth period = 6% Tax rate during the stable growth period = 25% Assume that the dividend payout ratio remains constant at the current level for the first two years. Spring 2020 FINAN 575-A Intermediate Finance Chapter 9 Stock Valuation Two-Stage Dividend Discount Model Name 1. A firm is expected to have a high growth rate in the next 2 years and a stable growth rate of 6% forever after that. Use the following information to find the stock value. Inputs for the high growth period: Current earnings per share (EPSO) = $4.00 Current dividend per share (DPS)) = $1.00 Length of the high-growth period = 2 years Long-term bond rate (proxy for the risk-free rate) = 5% Market risk premium = 6% Beta of the stock for the high-growth period = 1.6 Return on assets (ROA) during the high growth period = 20% Debt to equity ratio during the high growth period = 0.70 Before-tax interest rate on debt for the high growth period = 7% Tax rate during the high growth period = 25% Inputs for the stable growth period: Stable growth rate forever = 6% Beta of the stock for the stable growth period = 1.1 Long-term bond rate (proxy for the risk free rate) = 5% Market risk premium = 6% Return on assets (ROA) during the stable growth period = 0.18 Debt to equity ratio during the stable growth period = 0.70 Before-tax interest rate on debt for the stable growth period = 6% Tax rate during the stable growth period = 25% Assume that the dividend payout ratio remains constant at the current level for the first two years
