Due to unfavorable economic conditions,EFB Company's earnings and dividends are expected to remain unchanged for the next 3 years.After 3 years,dividends are expected to grow at a 10% annual rate forever.The last dividend was $2,and the required rate of return is 20%.What should be the current market value of EFB stock?

Question

Quizplus · Accepted Answer

Step 1 - Calculate the no growth cash flows and discount them back to today.
PV = 11ea7fdb_fbf6_4ed5_a768_e342d0313edc_TB2902_11 = $1.67
PV = 11ea7fdb_fbf6_4ed6_a768_8b19301d8446_TB2902_11 = $1.39
PV = 11ea7fdb_fbf6_4ed7_a768_87094be8d4cc_TB2902_11 = $1.16
Step 2 - Add these cash flows together.
1.67 + 1.39 + 1.16 = $4.22
Step 3 - Use the Gordon Model to calculate the constant-growth cash flows and discount them back. 11ea7fdb_fbf6_4ed8_a768_1739ba548be5_TB2902_11 = 11ea7fdb_fbf6_4ed9_a768_d70f705a7a54_TB2902_11 11ea7fdb_fbf6_75ea_a768_ab40f1ab27c8_TB2902_11 = 11ea7fdb_fbf6_75eb_a768_c910675c35bc_TB2902_11 = $22
PV = 11ea7fdb_fbf6_75ec_a768_5f9658eba95f_TB2902_11 = $12.73
Step 4 - Add all of the present values together to get the current stock price.
4.22 + 12.73 = $16.95

Due to Unfavorable Economic Conditions,EFB Company's Earnings and Dividends Are