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Question
00% 30.00% 30.00% 30.00% 6.91%
Dividend $1.0000 $1.3000 $1.6900 $2.1970 $2.8561 $3.0534
Horizon value = D5/(rs - g5): 59.97
Total CFs $1.30 $1.69 $2.20 $62.83
PV of CFs $1.16 $1.35 $1.56 $39.93
Stock price = $44.00. Must equal $44. Change the forecasted growth rate till reach $44.
We must solve for the long-run growth rate. We can forecast the dividends in Years 1-4, so they are inserted in the time line. We need a growth rate to find D5 and the HV. We begin with a guess of say 5.0%, which we insert in the forecast cell. We then find the PV of the forecasted CFs and sum them. If the sum equals the given price, then our growth rate would be correct. If not, we need to substitute in different g's until we find the one that works. We used Excel's Goal Seek function to simplify the process, but one could use trial and error.
u200b
LOCAL STANDARDS: United States - OH - Default City - Tier 2: - Capital structure
Answer
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