Question

The current dividend paid by Astromarketis $1. It is expected to grow by 40% a year for two years, and then at 3% forever. The company cost of capital is 10%. What is the value of Astromarket stock

Answer 1

Answer:

P₀ = $26.73

Explanation:

Div₀ = $1 (current dividend)

Div₁ = $1.40 (40% growth)

Div₂ = $1.96 (40% growth)

Div₃ = $2.0188 (3% growth rate forever)

the terminal value at year 2 = Div₃ / (Re - g) = $2.0188 / (10% - 3%) = $28.84

P₀ = $1.40/1.1 + $1.96/1.1² + $28.84/1.1² = $26.73