The growth in per share FCFE of CBS, Inc.is expected to be 10% per year for the next two years, followed by a growth rate of 5% per year for three years.After this five-year period, the growth in per share FCFE is expected to be 2% per year, indefinitely.The required rate of return on CBS, Inc.is 12%.Last year's per share FCFE was $2.00.What should the stock sell for today?

Question

Quizplus · Accepted Answer

To find the value of the stock today, we use the dividend discount model for a multi-stage growth company. The calculation involves finding the present value of the FCFE during each growth phase and the terminal value at the end of the high growth period, then discounting these values back to the present.1. Calculate FCFE for each of the first 5 years:   - Year 1: $2.00 * (1 + 10%) = $2.20   - Year 2: $2.20 * (1 + 10%) = $2.42   - Year 3: $2.42 * (1 + 5%) = $2.54   - Year 4: $2.54 * (1 + 5%) = $2.67   - Year 5: $2.67 * (1 + 5%) = $2.802. Calculate the terminal value at the end of Year 5 using the Gordon Growth Model (also known as the Perpetuity Growth Model):   - Terminal Value = Year 5 FCFE * (1 + g) / (r - g) = $2.80 * (1 + 2%) / (12% - 2%) = $2.86 / 0.10 = $28.603. Discount each FCFE and the terminal value back to present value:   - PV of Year 1 FCFE = $2.20 / (1 + 12%)^1 = $1.96   - PV of Year 2 FCFE = $2.42 / (1 + 12%)^2 = $1.93   - PV of Year 3 FCFE = $2.54 / (1 + 12%)^3 = $1.81   - PV of Year 4 FCFE = $2.67 / (1 + 12%)^4 = $1.70   - PV of Year 5 FCFE = $2.80 / (1 + 12%)^5 = $1.60   - PV of Terminal Value = $28.60 / (1 + 12%)^5 = $16.214. Sum the present values to get the total value of the stock today:   - Total Value = $1.96 + $1.93 + $1.81 + $1.70 + $1.60 + $16.21 = $25.21Therefore, the stock should sell for $25.21 today.

The Growth in Per Share FCFE of CBS, Inc