XYZ Inc. is expected to pay no dividends for the next 5 years. However, at the end of the sixth year (at time 6), the co
Posted: Fri Mar 04, 2022 9:34 am
XYZ Inc. is expected to pay no dividends for the next 5 years.
However, at the end of the sixth year (at time 6), the company is
expected to pay a dividend of $1/share. Dividends are expected to
grow at 10% per year for the following 9 years (through the end of
the 15th year, i.e., time 15), then to grow at 3% every year
thereafter (forever). The company has an equity beta of 1, the
risk-free rate is 2% (rf = 2%), and the market risk premium is 4%
(rM-rf = 4%). (2 points each)
a. What is the required return on XYZ’s equity?
b. What is the expected value of the stock at time 15 (not
including the time 15 dividend)?
c. What is the expected value of the stock at time 5?
d. What is the value of the stock today?
However, at the end of the sixth year (at time 6), the company is
expected to pay a dividend of $1/share. Dividends are expected to
grow at 10% per year for the following 9 years (through the end of
the 15th year, i.e., time 15), then to grow at 3% every year
thereafter (forever). The company has an equity beta of 1, the
risk-free rate is 2% (rf = 2%), and the market risk premium is 4%
(rM-rf = 4%). (2 points each)
a. What is the required return on XYZ’s equity?
b. What is the expected value of the stock at time 15 (not
including the time 15 dividend)?
c. What is the expected value of the stock at time 5?
d. What is the value of the stock today?