Google has just declared a dividend of $2.12 on its common stock.Dividends are paid annually.Dividends are expected to grow at the rapid pace of 10% for the next 4 years,after which growth is expected to slow to 3% per annum forever.During the rapid growth phase,the required return on this investment will be 20%,and it is expected to drop to 12% when growth slows.What is the current market value of this stock?

Question

Quizplus · Accepted Answer

Step 1 - Calculate the present value of the rapid-growth cash flows.
PV = 11ea7fdb_fbf4_04ac_a768_afd9af8e9007_TB2902_11 = $1.94
PV = 11ea7fdb_fbf4_04ad_a768_b3d4d1e475fa_TB2902_11 = $1.78
PV = 11ea7fdb_fbf4_04ae_a768_e3dfd33c8067_TB2902_11 = $1.63
PV = 11ea7fdb_fbf4_04af_a768_a93ee7df481c_TB2902_11 = $1.50
Step 2 - Calculate the value of the stock once the dividends begin growing at a constant rate and discount it back to today. 11ea7fdb_fbf4_04b0_a768_819ea68dcb55_TB2902_11 = 11ea7fdb_fbf4_04b1_a768_c5312a0e17aa_TB2902_11 11ea7fdb_fbf4_2bc2_a768_392d9d7d7221_TB2902_11 = 11ea7fdb_fbf4_2bc3_a768_1d41a4f7d561_TB2902_11 = $35.52
PV = 11ea7fdb_fbf4_2bc4_a768_fb39c2ec3ff1_TB2902_11 = $17.13
Step 3 - Add all of the present values together.
1.94 + 1.78 + 1.63 + 1.50 + 17.13 = $23.98

Google Has Just Declared a Dividend of $2