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Problem Walk-Through

Nonconstant Growth Stock Valuation

Assume that the average firm in your company's industry is expected to grow at a constant rate of 4% and that its dividend yield is 6%. Your company is about as risky as the average firm in the industry and just paid a dividend (D₀) of $1.5. You expect that the growth rate of dividends will be 50% during the first year (g_0,1 = 50%) and 30% during the second year (g_1,2 = 30%). After Year 2, dividend growth will be constant at 4%. What is the required rate of return on your companys stock? What is the estimated value per share of your firms stock? Do not round intermediate calculations. Round the monetary value to the nearest cent and percentage value to the nearest whole number.

r_s: %

: $