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Value of common stock

Fast Grow Corporation is expecting dividends to grow at a 20% rate for the next 2 years. The corporation just paid a $2 dividend and the next dividend will be paid 1 year from now. After 2 years of rapid growth dividends are expected to grow at a constant rate of 9% forever.

a/ If the required return is 14%, what is the value of Fast Grow Corporation common stock today?
b/ Assume the annual dividend grows at a constant rate of 9% indefinetly instead of the supernormal growth. How much is the stock worth if the dividends grow annually at 9%?

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Solution Preview

a) The value is the present value of all dividends. We first calculate the dividends
D1 = 2 X 1.20 = 2.40
D2 = 2.40 X 1.20 = 2.88
D3 = 2.88 X 1.09 = 3.14
From year 3 onwards dividends grow at a ...

Solution Summary

The solution explains how to determine the value of common stock