AAA is a fast-growing communications company. The company did not pay a dividend last year and is not expected to do so for the next two years. Last year the company’s growth accelerated, and management expects to grow the business at a rate of 40 percent for the next four years before growth slows to a more stable rate of 10 percent. In the third year, the company has forecasted a dividend payment of $1.10. Dividends will grow with the company thereafter. Calculate the value of the company’s stock at the end of its rapid growth period (i.e., at the end of four years). The required rate of return for such stocks is 15 percent. What is the current value of this stock?

AAA is a fast-growing communications company. The company did not pay a dividend last year and is not expected to do so for the next two years. Last year the company’s growth accelerated, and management expects to grow the business at a rate of 40 percent for the next four years before growth slows to a more stable rate of 10 percent. In the third year, the company has forecasted a dividend payment of $1.10. Dividends will grow with the company thereafter. Calculate the value of the company’s stock at the end of its rapid growth period (i.e., at the end of four years). The required rate of return for such stocks is 15 percent. What is the current value of this stock?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 22P

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