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Happy Feet Inc
Happy Feet Inc. dividends are expected to grow at 30% for the next 3 years, with the growth rate falling off to 6% thereafter. If the required return is 11% and the company just paid a $2 dividend. What is the current stock price? 68.82 65.43 72.76 76.41
The Smart Start Corporation expects to pay a dividend chars2.50 per share at the end of the 2.50 year. Management expects dividends to grow at a constant rate of 4% per year. If the required rate of return on the company's stock is 12%, how much would the stock be worth at the end of two years from today? 42.1 33.8 36.3 44.6
Expert Solution
| Happy Feed Inc | |||
| High Growth period | |||
| Year | 1 | 2 | 3 |
| Dividend (growing at 30% from $2) | 2.6 | 3.38 | 4.394 |
| PV factor @ 11% | 0.9009 | 0.8116 | 0.7312 |
| PV of dividends | 2.34 | 2.74 | 3.21 |
| Total (I) | 8.30 | ||
| Normal Growth period | |||
| Year | 4 | ||
| Dividend (D4) | 4.65764 | (106% of dividend of 3rd year) | |
| Value of share at Year 3 = | (D4 / Ke - g) = | 4.65 / 11% - 6% | 93.1528 |
| PV of share (Year 0) (II) | 93.1528 * 0.7312 | ||
| = | 68.1125245 | ||
| Current value of share (I + II) | 76.41 |
Hence, Option D $ 76.41 is the correct answer
| Smart Start Corporation | |||
| Year | 2 | ||
| Dividend (D3) | 2.704 | ($2.5 * 1.04 * 1.04) | |
| Growth Rate | 4% | ||
| Re | 12% | ||
| Value of share after 2 years (P2) = | D3 / (Re - g) = | 2.704 / (12% - 4%) | 33.8 |
Hence, Option b 33.8 is the correct answer
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