A fast growing firm recently paid a dividend of $0.50 per share. The dividend is expected to increase at a 25 percent rate for the next 3 years. Afterwards, a more stable 12 percent growth rate can be assumed. If a 15 percent discount rate is appropriate for this stock, what is its value?

Question

Quizplus · Accepted Answer

To find the stock's value, calculate the present value of dividends for the first 3 years using the 25% growth rate, then calculate the terminal value at the end of year 3 using the 12% growth rate and discount it back to the present value. Sum these values to get the stock's value.

A Fast Growing Firm Recently Paid a Dividend of $0