Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Foundations Of Finance

Authors: Arthur J Keown, John D Martin, J William Petty

7th Edition

0133370356, 9780133370355

More Books

Students also viewed these Finance questions

Question

The quality of the proposed ideas

Answered: 1 week ago

Question

The number of new ideas that emerge

Answered: 1 week ago