What is the value of a stock that grows at a supernormal rate of 18% for the first four years, and then slows down to a constant growth rate of 10%? An annual dividend of $2.00/share was just paid, and the rate of return on common stock is 13%.
2 answers
Would anyone be able to help me get started with the formula?
I think this is the solution. Please let me know what you think.
Supernormal Growth:
D0 = $2.00
D1 = 2.00(1+0.18) = $2.36
D2 = 2.36(1+0.18) = $2.78
D3 = 2.78(1+0.18) = $3.28
D4 = 3.28(1+0.18) = $3.87
Constant Growth:
D5 = [3.87(1+0.10)] / [0.13 – 0.10] = 4.257 / 0.03 = $141.90
Supernormal Growth:
D0 = $2.00
D1 = 2.00(1+0.18) = $2.36
D2 = 2.36(1+0.18) = $2.78
D3 = 2.78(1+0.18) = $3.28
D4 = 3.28(1+0.18) = $3.87
Constant Growth:
D5 = [3.87(1+0.10)] / [0.13 – 0.10] = 4.257 / 0.03 = $141.90
0 answers