Question
Can you please check this work to see if i done it correctly. i left out section D on purpose. Thank you Problem 9.37 Supernormal
Can you please check this work to see if i done it correctly. i left out section D on purpose. Thank you
Problem 9.37 Supernormal Growth Ceebros Builders is expanding very fast and is expected to grow at a rate of 25 percent for the next four years. The company recently paid a dividend of $3.60 but is not expected to pay any dividends for the next 3 years. In year 4, management expects to pay a $5 dividend and thereafter to increase the dividend at a constant rate of 6 percent. The required rate of return on such stocks is 20 percent.
a. Calculate the present value of the dividends during the fast growth period. D0 = $3.60 g1-4 = 25.00% Required Rate of Return (R) = 20.00% D1 = $4.5000 PV_D1 = $3.7500
D2 = $5.6250 PV_D2 = $3.9063
D3 = $7.0313 PV_D3 = $4.0690
D4 = $8.7891 PV_D4 = $4.2386
PV of Dividends (years 1-4): $15.9638
b. What is the value of the stock at the end of the fast growth period (i.e. P4)?
Hint: Calculate D5 (expected dividend in year 5) and use the constant growth dividend model to estimate P4.
Constant Growth Rate (g) = 6.00%
D5 = $9.3164
P4 = $66.5458
c. What is the value of the stock today?
Hint: Find the present value of P4 and add this amount to the present value of the first four years of dividends.
PV_P4 = $26.7432
Current Price of the Stock (P0) = $42.71
d. Would today's stock value be affected by the length of time you intend to hold the stock?
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