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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:
| Year | Earnings ($) | Dividends ($) |
| 0 | 1.00 | 0.00 |
| 1 | 1.50 | 0.00 |
| 2 | 2.25 | 0.45 |
| 3 | 3.375 | 0.675 |
| 4 | 4.219 | 0.844 |
| 5 | 5.273 | 2.637 |
| 6 | 6.592 | 3.296 |
| 7 | 7.119 | 3.560 |
Here,
Here,
FV refers to future value of investment,
i is interest rate,
n is number of periods,
PVIF refers to a used for calculation.
Hence, the price of stock will be $13.21
Explanation of Solution
Given information:
Earning growth rate for starting three years will be = 50%
Earning growth rate for following three years will be = 25%
After that earning growth rate will be = 8%
Required equity return will be 20% (2-4 years), afterwards 50%
Calculation of current value of stock:
| Year | Earnings ($) | Dividends ($) |
| 0 | 1.00 | 0.00 |
| 1 | 1.50 | 0.00 |
| 2 | 2.25 | 0.45 |
| 3 | 3.375 | 0.675 |
| 4 | 4.219 | 0.844 |
| 5 | 5.273 | 2.637 |
| 6 | 6.592 | 3.296 |
| 7 | 7.119 | 3.560 |
Here,
Here,
FV refers to future value of investment,
i is interest rate,
n is number of periods,
PVIF refers to a used for calculation.
Hence, the price of stock will be $13.21
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Chapter 7 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT