EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
bartleby

Videos

Question
Book Icon
Chapter 7, Problem 22P
Summary Introduction

To determine: Current value of stock.

Given information:

Earning growth rate for starting three years will be = 50%

Earning growth rate for following three years will be = 25%

After that earning growth rate will be = 8%

Required equity return will be 20% (2-4 years), afterwards 50%

Calculation of current value of stock:

YearEarnings ($)Dividends ($)
01.000.00
11.500.00
22.250.45
33.3750.675
44.2190.844
55.2732.637
66.5923.296
77.1193.560

    Pm=Dm+1keg2

Here,

Pm is the stock value at the end of period,

Dm+1 refer to the dividend payment after non constant growth,

ke refer to expected rate of return,

g2 is expected growth after nonconstant growth.

    P6= $3.56/0.20  0.08 = $29.667

    P0=FVn(PVIFi,n)

Here,

FV refers to future value of investment,

i is interest rate,

n is number of periods,

PVIF refers to a used for calculation.

    P0= $0 + $0.45PVIF0.2,2 +$0.675PVIF0.2,3 + $0.844PVIF0.2,4 + $2.637PVIF0.2,5                  + $3.296 + $29.667 PVIF0.2,6 =$13.21

Hence, the price of stock will be $13.21

Expert Solution & Answer
Check Mark

Explanation of Solution

Given information:

Earning growth rate for starting three years will be = 50%

Earning growth rate for following three years will be = 25%

After that earning growth rate will be = 8%

Required equity return will be 20% (2-4 years), afterwards 50%

Calculation of current value of stock:

YearEarnings ($)Dividends ($)
01.000.00
11.500.00
22.250.45
33.3750.675
44.2190.844
55.2732.637
66.5923.296
77.1193.560

    Pm=Dm+1keg2

Here,

Pm is the stock value at the end of period,

Dm+1 refer to the dividend payment after non constant growth,

ke refer to expected rate of return,

g2 is expected growth after nonconstant growth.

    P6= $3.56/0.20  0.08 = $29.667

    P0=FVn(PVIFi,n)

Here,

FV refers to future value of investment,

i is interest rate,

n is number of periods,

PVIF refers to a used for calculation.

    P0= $0 + $0.45PVIF0.2,2 +$0.675PVIF0.2,3 + $0.844PVIF0.2,4 + $2.637PVIF0.2,5                  + $3.296 + $29.667 PVIF0.2,6 =$13.21

Hence, the price of stock will be $13.21

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Answers for all the questions
Hello experts Answer should be match in options. Many experts are giving incorrect answer they are using AI /Chatgpt that is generating wrong answer. i will give unhelpful if answer will not match in option. dont use AI also
3. Owen expects to receive $20,000 at the beginning of next year from a trust fund. If a bank loans money at an interest rate of 7.5%, how much money can he borrow from the bank based on this information? A. $12879.45 B. $12749.67 C. $15567.54 D. $174537.34
Knowledge Booster
Background pattern image
Finance
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
What is Corporate social responsibility (#CSR) ?; Author: Servier International;https://www.youtube.com/watch?v=1bpf_sHebLI;License: Standard Youtube License