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XYZ Corp
XYZ Corp. normally grows at a constant rate of 3%, and stockholders require 12% return for their holdings in XYZ stocks. However, the company is expected to grow at 20% each year for the next two years and then again the growth rate will decline to the normal average rate of 3%. If the recently paid out dividend yesterday was $2.25/share, what is the fair market value of XYZ stocks?
Expert Solution
D1=(2.25*1.2)=2.7
D2=(2.7*1.2)=3.24
Value after year 2=(D2*Growth rate)/(Required return-Growth rate)
=(3.24*1.03)/(0.12-0.03)
=37.08
Hence fair value=Future dividend and value*Present value of discounting factor(rate%,time period)
=2.7/1.12+3.24/1.12^2+37.08/1.12^2
=$34.55(Approx)
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