Q: Winters Hi-Hook Inc., a golf club manufacturer, is currently paying dividends of $.50 per share. These dividends are expected to grow at a 20 percent rate for the next two years and at a three

percent rate thereafter (forever!). What is the value of the stock if the appropriate discount rate is 14 percent?

A: $6.26 is the value of the stock if the appropriate discount rate is 14 percent.
Solution:
D1 = D0 (1 + g) = $0.50 (1.20) = $0.60
D2 = D1 (1 + g) = $0.60 (1.20) = $0.72
D3 = D2 (1 + g) = $0.72 (1.03) = $0.74
P2 = D3/(r - g) = $0.74/(0.14 - 0.03) = [ $0.74/0.11 = $6.73
P0 = [D1/(1 + r)] + [D2/(1 + r)2] + [P2/(1 + r)2]
= [$0.60/(1.14)] + [$0.72/(1.14)2] + [$6.73/(1.14)2] = $0.526 + $0.554 +

$5.179 = $6.26
]

Expert answered|emdjay23|Points 1741|

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