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Shrek, Inc, just paid a dividend of $4
Shrek, Inc, just paid a dividend of $4.00. The company expects to have a supernormal year and grow at 10% over the next year. After that, the company will have constant growth rate of 5% forever. The cost of equity capital for the company is 9%. What is the company’s current stock price based on the above data?
|
$120 |
|
|
$110 |
|
|
$100 |
|
|
$87.52 |
Expert Solution
Answer;
Option $110
Explanation;
Present Value of Stock = D1/(1+ke) + [D2 / (ke-g)]/(1+ke)
here,
D0 = $4
D1 = D0 + Supernormal Growth i.e. $4 + 10% = $4.40
D2 = D1 + Constant Growth i.e. $4.40 + 5% = $4.62
Ke ( Required Return) = 9%
G = Contant Growth i.e 5%
so,
Present Value of Stock = $4.4 / (1+9%) + [ $4.62/(9%-5%)] / (1+9%)
Present Value of Stock = $4.4 / 1.09 + [ $4.62/4%] / (1.09%)
Present Value of Stock = $4.04+ $115.5/ 1.09
Present Value of Stock = $4.04+ $105.96
Present Value of Stock = $110
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