The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 18 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $2.50 per share. What is the current value of one share of this stock if the required rate of return is 8.00 percent? a. $73.39 b. $88.43 c. $99.85 d. $102.35 e. $85.93

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TomShelby TomShelby · Answer 1 · 2020-02-28T06:48:14+01:00

Answer:

e. $85.93

Explanation:

[tex]\frac{Maturity}{(1 + rate)^{time} } = PV[/tex]

discount rate 0.08

# Cashflow* Discounted

0 0

1 2.95 2.73

2 3.481 2.98

3 4.10758 3.26

4 4.8469444 3.56

4 99.84705464 73.39

85.92

As we have paid a dividend of 2.50

we calcaulte the subsequent dividends by mutiplying by the grow rate

2.50 x (1 + 18%) = 2.95

2.95 x (1 + 18%) = 3.481

Then, once the grow is stable we solve using the gordon formula:

dividnds / (return - growth)

(4.8469444 x 1.03) / (0.08-0.03) = 99.84705464

Last step we solve for the present value of each one giving a total of 85.92